Is the Public Sector Generating Sufficient Revenue from Its Resources? The Investment Behavior of Public and Private Firms

Abstract

Public and private firms invest differently. Stock markets provide investors with liquidity and opportunities for diversification and reduce firms’ cost of capital. The authors evaluate the differences in investment behavior between market-listed and privately held firms in India using a new data source on private firms. They observe that listed firms invest less and are less responsive to changes in investment opportunities than private firms. These differences are not because of unobserved differences between public and private firms, how they measure investment opportunities, or lifecycle differences. The patterns are consistent with theoretical models emphasizing the role of managerial myopia.