The Effects of Public and Private Equity Markets on Firm Behavior

Abstract

In this article, I review the theoretical and empirical literature on the effects of public and private equity markets on firm behavior, emphasizing the consequences that emerge from disclosure requirements, ownership concentration, and degree of firm standardization. While publicly listed firms benefit from a lower cost of capital, enabling increased focus on commercialization and profitability, they are less suited to pursue long-term risky investments. Privately held firms are better equipped to pursue innovative projects but face a higher cost of capital, which limits their growth. Complementarities between public and private equity markets can mitigate their respective limitations. Innovation in private equity markets supplements commercialization efforts of public firms, and demand for innovation by public firms accelerates entrepreneurial activity in private equity markets. I conclude by discussing directions for future research. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Financial Reporting Around Private Firms’ Equity Offerings

“…1 In 2017 alone, private markets provided approximately twice as much funding as public markets at the federal level (Bauguess et al 2018). While becoming the key source of capital for many firms, the private markets are characterized by low transparency levels due to less stringent disclosure regulations compared to public markets (Bernstein 2022). This lack of transparency, along with the growing scale of private markets, has raised concerns over adequate investor protection.…”

“…3 These points are discussed in the Private Company Decision-Making Framework released by the Private Company Counsel of the Financial Accounting Standards Board as differential factors that may alter financial reporting considerations of private companies. Also see discussions on differences between private and public firms in Bernstein (2022), Ewens and Farre-Mensa (2021), Hope and Vyas (2017), and Minnis and Shroff (2017).…”

IPOs and SPACs: Recent Developments

“…Su, Zhang & Zhang (2023) show that IPO firms with greater underpricing have lower post-IPO borrowing costs if they operate in industries with above-median expenses on advertisements. Newly public firms also demonstrate different investment behavior (see Bernstein 2022;Gilje & Taillard 2016).…”

Hospital Behavior Over the Private Equity Life Cycle

“…Prior to then, firms would typically raise capital via stock issues in public markets in order to finance expansions and investments as well as to shore up their balance sheets. However, 21 st century corporate finance has witnessed the rise and now dominance of private funding to achieve these business aims (Mauboussin and Callahan 2020;Bernstein 2022;McKinsey & Company 2022). Private market funding can originate among a mix of investment industries, such as real estate trusts and venture capital firms, but private equity (i.e., "PE") companies, specifically, loom large in this space, with extensive amounts of capital (i.e., "dry powder") available to deploy.…”