Capital Market Myopia and Plant Productivity

The following post comes to us from Sreedhar Bharath of the Department of Finance at Arizona State University, Amy Dittmar of the Department of Finance at the University of Michigan, and Jagadeesh Sivadasan of the Business Economics Department at the University of Michigan.

In the paper, Does Capital Market Myopia Affect Plant Productivity? Evidence from Going Private Transactions, which was recently made publicly available on SSRN, we hypothesize that if capital markets pressure listed firms to be myopic in a way that impacts efficiency (an influential criticism of the stock market oriented U.S. financial system), then going private (when myopia is eliminated) should cause U.S. firms to improve their establishment level productivity relative to a peer control groups of firms.

We find no evidence that this is the case. Our key finding is that while there is evidence for substantial within-establishment increases in productivity after going private, there is little evidence of difference-in-differences efficiency gains relative to peer groups of establishments constructed to control for industry, age, size at the time of going private, and the endogeneity of the going private decision effects. Also, we do not find evidence that myopic markets lead to under-investment at the establishment level. On the contrary, we find that after going private, firms shrink capital and employment, and close plants more quickly, relative to peer groups.

In general, our findings cast doubt on the view that public markets cause listed firms to make sub-optimal, productivity-decreasing choices, or under-invest at the establishment level.

The full paper is available for download here.

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