Do Public Companies Underinvest?
Three professors say yes.
Living for the Moment
An academic working paper finds that public companies live for the moment. That is, public companies invest less in their businesses than do private companies so that they can boast better current results.
In "Corporate Investment and Stock Market Listing: A Puzzle?," professors John Asker, Joan Farre-Mensa, and Alexander Ljungqvist held company size and industry constant and found that the private companies in their (new and extensive) database plowed an average of 6.8% of their assets back into their businesses each year, as opposed to 3.7% for the public companies. What's more, the professors assert, private companies are "four times more responsive to changes in investment opportunities than are those of public firms." The data covers the time period 2001-11. The professors calculate investment by summing a company's spending on capital expenditures, or capex, and mergers and acquisitions, or M&A.