How Does Private Firm Disclosure Affect Demand for Public Firm Equity? Evidence from the Global Equity Market

Abstract

We investigate the relationship between private firms’ disclosures and the demand for the equity of their publicly traded peers. Using data on the global movement of public equity, we find that a one standard deviation increase in private firm disclosure transparency – proxied by the number of disclosed private firms’ financial statement line items – reduces global investors’ demand for public equity by 11% to 12% or $174 million to $190 million in dollar terms. These findings are consistent with private firm disclosures generating negative pecuniary externalities – global investors reallocate their capital away from public firms to more transparent private firms – and less consistent with these disclosures creating positive information externalities that would benefit public firms. Consistent with this interpretation, we find that the reduction in demand for public equity is offset by a comparable increase in capital allocation to more transparent private firms. Using staggered openings of the Bureau van Dijk database offices and implementation of electronic business registers in investee countries as plausibly exogenous shocks to private firm transparency, we conclude that the negative relationship between private firm disclosures and public equity demand is likely causal.