N°23-89: Investment Efficiency of Private and Public Firms

Public firms, when organizationally complex, experience increases in statement complexity and investment inefficiency after the Sarbanes-Oxley Act. We further find that during periods of uncertainty and when operating within industries characterized by increased environmental activism, consumer focus, and greater labor expenditure, public firms tend to exhibit higher levels of inefficiency. Yet private firms, when more financially constrained, exhibit greater investment efficiency. ?e more efficient investment of private firms translates into future profitability gains. Overall, the investment inefficiency of public firms does not stem from higher agency costs but rather from the inherent difficulty and costs of managing a complex organization.