Sheen (2009) - Do Public And Private Firms Behave Differently An Examination Of Investment In The Chemical Industry
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- Sheen, Albert (2009), "Do public and private firms behave differently? An examination of investment in the chemical industry", Unpublished working paper, UCLA. pdf
Using a comprehensive panel dataset of U.S. production capacity by firm in seven commodity chemical industries, I compare the investment behavior of public and private firms when presented with near identical project opportunities. I find that private firms invest differently, and more efficiently, than public firms. Specifically, private firms are more likely than public firms to increase capacity prior to a positive demand shock (an increase in price and quantity) and less likely to increase capacity before a negative demand shock. This result holds when considering only a subsample of firms that change incorporation status. The private firm investment advantage is particularly strong among leveraged buyouts and is not explained by the level of chemical division diversification. These findings are consistent with theories in which public firms are subject to greater agency concerns, leading to sub-optimal investment relative to private firms.