Do Public Firms Get a Bad Rap?

SMITH BRAIN TRUST – Pressure to deliver quarterly returns can drive managerial myopia. Recent studies link the short-termism with significant investment distortion on Wall Street, powerful enough to induce public firms to invest less in industry growth opportunities than private firms. But a deeper analysis tells a different story.

New research from finance professor Liu Yang at the University of Maryland’s Robert H. Smith School of Business, along with two co-authors, shows that public and private companies respond similarly to investment opportunities when quality differences are considered at firm birth.

“Being public by itself is a selection,” Yang says. “Simply comparing public and private firms at one point in time may risk confounding differences in public status with inherent differences in quality between firms.”

In her working paper, she and her co-authors track firms at birth and compare the growth patterns of firms that go public with their birth-matched always-private counterparts.

“We show that firms’ initial conditions at birth predict their future growth trajectories and public status,” Yang says. “Once the initial quality of the firms is controlled for, there is no evidence that public firms are less responsive to demand shocks than private firms.”

Overall, public firms grow faster and respond better to positive demand shocks in the first five years after the initial public offering than birth-matched private firms.

“The evidence suggests that managerial myopia, which some believe characterizes public firms’ responses to investment opportunities, is not likely to be a significant counterweight to the benefits of being public,” Yang says.

Read more: Do Public Firms Respond to Investment Opportunities More than Private Firms? The Impact of Initial Firm Quality is a working paper by Vojislav Maksimovic, Gordon M. Phillips and Liu Yang.

Liu Yang is an associate professor in finance at the University of Maryland’s Robert H. Smith School of Business. She is also executive director of the University of Maryland Federal Statistical Research Data Center.

Research interests: Corporate finance, including mergers and acquisitions, corporate restructuring, corporate governance, labor economics and financial institutions; influence of female leadership on gender wage gaps.

Selected accomplishments: 2013 and 2014 top 15 percent teaching award, UMD; 2011 research grant, Harold and Pauline Price Center for Entrepreneurial Studies, UCLA; 2010 research grant, Fink Center for Finance & Investment, UCLA; 2010 Best Paper in Corporate Finance, Financial Management Association Meetings; 2009 Best Paper, California Corporate Finance Conference.

About this series: Maryland Smith celebrates Women Leading Research during Women’s History Month. The initiative is organized in partnership with ADVANCE, an initiative to transform the University of Maryland by investing in a culture of inclusive excellence. Other Women's History Month activities include the eighth annual Women Leading Women forum on March 5, 2019.

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