Private versus Public Corporate Ownership: Implications for Future Changes in Profitability

2019 ◽  
Vol 32 (2) ◽  
pp. 27-55 ◽  
Author(s):  
Kristian D. Allee ◽  
Brad A. Badertscher ◽  
Teri Lombardi Yohn
Keyword(s):  
Data Availability ◽  
Private Firms ◽  
Corporate Ownership ◽  
Public And Private ◽  
Public Firms ◽  
Size Growth ◽  
Public Versus Private ◽  
Short Termism ◽  
Robust Evidence ◽  
Insight Into

ABSTRACT We investigate the association between public versus private ownership and future changes in profitability. Managers have long debated the implications of public and private corporate ownership; however, little empirical research has provided insight into the issue. We find robust evidence that public firms are associated with significantly lower future changes in operating profitability compared to private firms matched on current profitability, size, growth, and industry. We also find that the differential future changes in profitability of public and private firms manifests in both future changes in profit margins and changes in asset turnovers. Additionally, we find evidence consistent with an association between short-termism, competition, and agency costs and the lower future changes in profitability for public versus private firms. The results provide insight for managers and investors into the differential future changes in profitability of public versus private firms and into the factors that drive the differential profitability. JEL Classifications: M41; M42; M44. Data Availability: Data are available from sources identified in the paper.

Public versus Private Firm Responses to the Tax Rate Reduction in China

2013 ◽  
Vol 36 (1) ◽  
pp. 137-163 ◽  
Author(s):  
Kenny Z. Lin ◽  
Lillian F. Mills ◽  
Fang Zhang
Keyword(s):  
Private Firm ◽  
Private Firms ◽  
Rate Reduction ◽  
Short Term ◽  
Public And Private ◽  
Tax Rate ◽  
Public Firms ◽  
Public Versus Private ◽  
Statutory Tax Rate ◽  
Firm Responses

ABSTRACT This study examines how public and private firms in China respond to the 2008 statutory tax rate reduction from 33 percent to 25 percent. Using a proprietary dataset of private firms, we find that private firms report significantly more income-decreasing current accruals than do public firms in 2007, the year prior to the tax rate reduction. These negative accruals were substantial and material, both compared with public firms and compared with 2008 accruals. By shifting their taxable income from a high- to a low-tax year, private firms save about 8.58 percent of their total tax expenses in 2007. Our results suggest that countries contemplating tax rate changes should expect material inter-temporal income shifting by private firms when they predict the short-term effects of changes in the tax rate on revenue. JEL Classifications: H25; M41.

scholarly journals Innovation Strategy of Private Firms

2017 ◽  
Vol 53 (1) ◽  
pp. 1-32 ◽  
Author(s):  
Huasheng Gao ◽  
Po-Hsuan Hsu ◽  
Kai Li
Keyword(s):  
New Technology ◽  
Equity Markets ◽  
Life Cycles ◽  
Innovation Strategy ◽  
Private Firms ◽  
Investment Horizon ◽  
Public And Private ◽  
Public Firms ◽  
Innovation Strategies ◽  
Public Equity

We compare innovation strategies of public and private firms based on a large sample over the period 1997–2008. We find that public firms’ patents rely more on existing knowledge, are more exploitative, and are less likely in new technology classes, while private firms’ patents are broader in scope and more exploratory. We investigate whether these strategies are due to differences in firm information environments, CEO risk preferences, firm life cycles, corporate acquisition policies, or investment horizons between these two groups of firms. Our evidence suggests that the shorter investment horizon associated with public equity markets is a key explanatory factor.

scholarly journals CEO Turnover–Performance Sensitivity in Private Firms

2017 ◽  
Vol 52 (2) ◽  
pp. 583-611 ◽  
Author(s):  
Huasheng Gao ◽  
Jarrad Harford ◽  
Kai Li
Keyword(s):  
Chief Executive ◽  
Ceo Turnover ◽  
Private Firms ◽  
Board Structure ◽  
Turnover Rates ◽  
Public And Private ◽  
Public Firms ◽  
Performance Improvements ◽  
Performance Sensitivity ◽  
Quality Of Accounting Information

We compare chief executive officer (CEO) turnover in public and large private firms. Public firms have higher turnover rates and exhibit greater turnover–performance sensitivity (TPS) than private firms. When we control for pre-turnover performance, performance improvements are greater for private firms than for public firms. We investigate whether these differences are due to differences in quality of accounting information, the CEO candidate pool, CEO power, board structure, ownership structure, investor horizon, or certain unobservable differences between public and private firms. One factor contributing to public firms’ higher turnover rates and greater TPS appears to be investor myopia.

Real earnings management in public vs private firms in the GCC countries: a risk perspective

2017 ◽  
Vol 18 (2) ◽  
pp. 242-260 ◽  
Author(s):  
Khalid Al-Amri ◽  
Saif Al Shidi ◽  
Munther Al Busaidi ◽  
Serkan Akguc
Keyword(s):  
Earnings Management ◽  
Real Earnings Management ◽  
Private Firms ◽  
Flow Management ◽  
Public And Private ◽  
Content Type ◽  
Public Firms ◽  
Cash Flow Management ◽  
Gcc Countries ◽  
Private And Public

Purpose The purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation Council (GCC) countries. The paper also compares the level of real earnings management between public and private firms in the GCC area. Design/methodology/approach The GCC area is a unique setting to investigate the use of real earnings management because of the low enforcement of reporting standards and supervisory rules, lack of sophisticated financial analysis, specialized media tools and high concentration of capital ownership. The authors use different models of real earnings management proposed by Roychowdhury, 2006, cash flow management, productions cost management and discretionary expenses management to examine the use of real earnings management. Findings The paper documents evidence consistent with private and public firms using real earnings management to influence their earnings figures. The paper also shows that the level of real earnings management is higher for private firms compared to public firms when cash flow management and discretionary expenses management models are used. The production cost model results show evidence consistent with public firms only engaging in real earnings management through production cost reduction. Research limitations/implications The results of this study might not be applicable to other emerging markets. Practical implications The findings of this study should promote a general understanding of firms’ behavior in unique environment such as GCC countries. Regulators in the GCC region should be aware that real earnings management techniques have been used by firms and that extra caution is required when auditing or analyzing the financial information of private and public firms in the GCC market. Originality/value This paper contributes to the literature in many aspects. First, it provides additional evidence on the use of earnings management in unique market contexts outside the USA and Europe. The GCC markets share many common characteristics that make them interesting settings to be investigated. Second, this paper adds more evidence on the use of earnings management between public and private firms. In this regard, the paper adds additional evidence in the discussions proposed by Ball and Shivakumar (2005) and Givoly et al. (2010) who use two competing perspectives to investigate earnings quality in public and private firms: the demand hypothesis and the opportunistic behavior hypothesis.

Do Public and Private Firms Behave Differently? An Examination of Investment in the Chemical Industry

2019 ◽  
Vol 55 (8) ◽  
pp. 2530-2554 ◽  
Author(s):  
Albert Sheen
Keyword(s):  
Chemical Industry ◽  
Agency Problems ◽  
Private Firms ◽  
Demand Shock ◽  
Public And Private ◽  
Public Firms ◽  
Commodity Chemicals ◽  
Public Firm ◽  
And Control ◽  
The U.S

I compare the U.S. capacity expansion decisions of public and private producers of 7 commodity chemicals from 1989 to 2006. I find that private firms invest differently than public firms. Private firms are more likely than public firms to increase capacity prior to a positive demand shock (an increase in price and quantity) and less likely to increase capacity before a negative demand shock. Potential mechanisms include public firm overextrapolation of past demand shocks and agency problems arising from greater separation between ownership and control.

scholarly journals An Empirical Examination of the Compensation-Dividend Relation to Compare Conflict Resolution Strategies at Public versus Private Firms

2018 ◽  
Vol 7 (2) ◽  
pp. 248
Author(s):  
Amy J. N. Yurko
Keyword(s):  
Conflict Resolution ◽  
Family Firms ◽  
Private Firms ◽  
Empirical Examination ◽  
Total Compensation ◽  
Public Firms ◽  
Dividend Policies ◽  
Conflict Resolution Strategies ◽  
Public Versus Private ◽  
Resolution Strategies

While agency theory predicts that the unification of ownership and control of private family firms reduces agency concerns, some prior studies suggest that the complex family relationships of private, family firms increases agency conflicts.  To investigate these conflicting predictions, this study empirically examines with regression analysis how executive total compensation levels relate to dividends at public versus private firms to compare the conflict resolution strategies of public versus private firms.  For public firms, this study finds a positive compensation-dividend relation, indicating that public firms increase total compensation levels to reward executives for supporting firms’ dividend policies and realign the interests of owners and managers from the conflict created by dividends.  Drawing from special access to Forms 1120, this study examines a large sample of privately held U.S. firms.  For private firms, this study finds a negative compensation-dividend relation, indicating that private, family firms do not use compensation to realign the interests of owners and managers and overcome the conflict created by dividends.  This new evidence suggests that the ownership structure of private, family firms systematically mitigates agency concerns to some degree.  On a practical level, this study indicates that firms can provide compensation arrangements that support firms’ dividend policies, and that regulatory agencies should continue to focus on public firms where the great dispersion of ownership systematically increases agency concerns.   

scholarly journals CEO turnover in public and private organizations: analysis of the relevance of different performance horizons

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Esteban Lafuente ◽  
Miguel A. García-Cestona
Keyword(s):  
Path Dependency ◽  
Ceo Turnover ◽  
Private Firms ◽  
Turnover Rates ◽  
Short Term ◽  
Past Performance ◽  
Public And Private ◽  
Content Type ◽  
Public Firms ◽  
Going Private

PurposeThis paper investigates how past performance changes, prior CEO replacements and changes in the chairperson impact CEO turnover in public and large private businesses.Design/methodology/approachWe analyze 1,679 CEO replacements documented in a sample of 1,493 Spanish public and private firms during 1998–2004 by computing dynamic binary choice models that control for endogeneity in CEO turnovers.FindingsThe results reveal that different performance horizons (short- and long-term) explain the dissimilar rate of CEO turnover between public and private firms. Private firms exercise monitoring patience and path dependency characterizes the evaluation of CEOs, while public companies' short-termism leads to higher CEO turnover rates as a reaction to poor short-term economic results, and alternative controls—ownership and changes in the chairperson—improve the monitoring of management.Originality/valueOur results show the importance of controlling for path dependency to examine more accurately top executives' performance. The findings confirm that exposure to market controls affects the functioning of internal controls in evaluating CEOs and shows a short-term performance horizon that could be behind the recent moves of public firms going private or restraining shareholders' power.

Private Firm Investment and Public Peer Misvaluation

2019 ◽  
Vol 94 (6) ◽  
pp. 31-60 ◽  
Author(s):  
Brad A. Badertscher ◽  
Devin M. Shanthikumar ◽  
Siew Hong Teoh
Keyword(s):  
Mutual Fund ◽  
Private Firm ◽  
Data Availability ◽  
Private Firms ◽  
Fund Flows ◽  
Economic Competition ◽  
Common Input ◽  
Public Firms ◽  
Public Markets ◽  
Firm Investments

ABSTRACT We study how public firm misvaluation affects private peer firm investments. An economic competition hypothesis predicts a negative relation because misvaluation-induced new investment by public firms crowds out investment by private peers that share common input or output markets. An alternative shared sentiment hypothesis predicts a positive relation because private firm stakeholders share in the sentiment associated with misvaluation in public markets. Misvaluation is proxied using both the price-to-fundamental ratio and an exogenous instrument obtained from mutual fund flows. The evidence is consistent with the shared sentiment hypothesis, and robust to alternative treatments for growth opportunities. Private firms finance misvaluation-induced investment primarily internally or externally with debt, not equity. Finally, misvaluation-induced investment increases future return on investment for private firms, in contrast with public firms. Overall, these findings suggest that overvaluation in public markets increases private firm investments and has beneficial effects on private firm investments by relaxing financing constraints. JEL Classifications: G32; M41. Data Availability: Data are available from sources identified in the paper.

Corporate Governance and Pollution Externalities of Public and Private Firms*

2020 ◽  
Vol 33 (3) ◽  
pp. 1296-1330 ◽  
Author(s):  
Sophie A Shive ◽  
Margaret M Forster
Keyword(s):  
Corporate Governance ◽  
Greenhouse Gas ◽  
Ownership Structure ◽  
Mutual Fund ◽  
Negative Association ◽  
Private Firms ◽  
Firm Characteristics ◽  
Publicly Traded ◽  
Public And Private ◽  
Public Firms

Abstract The number of U.S. publicly traded firms has halved in 20 years. How will this shift in ownership structure affect the economy’s externalities? Using comprehensive data on greenhouse gas emissions from 2007 to 2016, we find that independent private firms are less likely to pollute and incur EPA penalties than are public firms, and we find no differences between private sponsor-backed firms and public firms, controlling for industry, time, location, and a host of firm characteristics. Within public firms, we find a negative association between emissions and mutual fund ownership and board size, suggesting that increased oversight may decrease externalities.

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