Research Summary

Why Are Most Firms Privately Held?

by Joan Farre-Mensa


Even among large U.S. firms, most choose to remain private rather than listing on a stock market. Professor Farre-Mensa argues that an important reason for this choice is public firms’ inability to disclose information selectively to investors. This situation leads to a “two-audiences” problem: investors need information to better value a firm, but if the information is made public it may benefit the firm’s product-market competitors. Being public involves a trade-off between the problem of two audiences and the benefit of the relatively lower cost of capital faced by public firms. Professor Farre-Mensa’s empirical analysis, consistent with this trade-off, shows that firms in industries with high disclosure costs are more likely to remain private, while firms in industries that require a large scale to operate efficiently are more likely to be public. He then establishes a new stylized fact: Public firms hold more cash than private firms, particularly when they operate in industries in which disclosing information to competitors is most costly. This finding suggests that public firms hoard cash in order to mitigate the disclosure costs associated with raising capital.