Investment Efficiency of Private and Public Firms

We document that private firms are more efficient in investment than public firms. Exploiting the Sarbanes-Oxley Act that reduces agency problems of public firms but raises their compliance costs, we find that public firms, especially those with more complex operations, become more inefficient after SOX. Private firms that are likely more financially constrained exhibit greater investment efficiency. Furthermore, during periods of heightened 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. Mediation tests show that the 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.