Asker FarreMensa Ljungqvist (2011) - Does The Stock Market Distort Investment Incentives

• This page is referenced in The NBER Entrepreneurship Research Boot Camp Page

Reference(s)

• Asker, John, Joan Farre-Mensa, and Alexander Ljungqvist (2011), "Does the stock market distort investment incentives?", Unpublished working paper, New York University. | SSRN link pdf

Abstract

Theory suggests that agency problems resulting from separation of ownership and control can cause stock market listed firms to invest suboptimally. To test whether they do, we evaluate differences in investment behavior between listed and private firms in the U.S. using a rich new data source on private firms. Listed firms invest less and are less responsive to changes in investment opportunities compared to observably similar private firms, especially in industries in which stock prices are particularly sensitive to current profits. Listed firms also tend to smooth earnings growth and dividends and avoid reporting losses. These patterns are consistent with models of managerial myopia and do not appear to be due to firms endogenously choosing to be public or private: Firms that go public for reasons other than to fund investment invest like private firms pre-IPO and like public firms post-IPO. Nor do the results appear to be driven by measurement error, tax effects, or firm life-cycle effects. Our evidence suggests that the stock market distorts investment, at least for the fast-growing companies in our sample. Key