Allee, K.D. (2020)

JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH American Accounting Association
Vol. 32, No. 2 DOI: 10.2308/jmar-52550

Summer 2020
pp. 27–55
Private versus Public Corporate Ownership: Implications

for Future Changes in Profitability
Kristian D. Allee
University of Arkansas
Brad A. Badertscher
University of Notre Dame
Teri Lombardi Yohn

Indiana University
Northwestern University
ABSTRACT: We investigate the association between public versus private ownership and future changes in
profitability. Managers have long debated the implications of public and private corporate ownership; however, little
empirical research has provided insight into the issue. We find robust evidence that public firms are associated with
significantly lower future changes in operating profitability compared to private firms matched on current profitability,
size, growth, and industry. We also find that the differential future changes in profitability of public and private firms
manifests in both future changes in profit margins and changes in asset turnovers. Additionally, we find evidence
consistent with an association between short-termism, competition, and agency costs and the lower future changes in
profitability for public versus private firms. The results provide insight for managers and investors into the differential
future changes in profitability of public versus private firms and into the factors that drive the differential profitability.
JEL Classifications: M41; M42; M44.

Data Availability: Data are available from sources identified in the paper.
Keywords: private ﬁrms; proﬁtability; future performance; short-termism; ownership structure.
I. INTRODUCTION
As a private company, Dell now has the freedom to take a long-term view. No more pulling R&D and growth
investments to make in-quarter numbers. No more trade-offs between what’s best for a short-term return and what’s
best for the long-term success of our customers.
—Michael Dell (2014)
Going private would enable Tesla to make decisions that are best for the long-term, rather than the short-term.
—Elon Musk (2018)
We are grateful for feedback and assistance with this project provided by Andrew Acito, Mark Bagnoli, Rajib Doogar, Tony Grieg, Kevin Laverty, Steven
Orpurt, Andrew Pierce, Kathy Petroni, and Susan Watts and seminar participants at Michigan State University, Purdue University, Seoul National
University, the University of Washington, Bothell, and the 2013 AAA Annual Meeting (discussant Frank Zhang). The manuscript has benefited greatly
from the comments of two anonymous reviewers and Shane S. Dikolli (editor). We thank Sageworks for allowing us access to the private firm database.
Additionally, we are grateful for support from the Garrison/Wilson Endowment and the Walton College of Business, PricewaterhouseCoopers and the
Mendoza College of Business, and the Conrad Prebys Professorship.
Kristian D. Allee, University of Arkansas, Sam M. Walton College of Business, Department of Accounting, Fayetteville, AR, USA; Brad A. Badertscher,
University of Notre Dame, Mendoza College of Business, Department of Accounting, Notre Dame, IN, USA; Teri Lombardi Yohn, Indiana University,
Kelley School of Business, Department of Accounting, Bloomington, IN, USA, Northwestern University, Kellogg School of Management, Department of
Accounting Information and Management, Evanston, IL, USA.
Editor’s note: Accepted by Shane S. Dikolli.
Submitted: January 2019
Accepted: July 2019
Published Online: September 2019
27
28 Allee, Badertscher, and Yohn
O
ne of the most fundamental decisions a manager must make with respect to a business is the form of ownership, in
terms of public versus private ownership. The advantages and disadvantages of public corporate ownership have been
debated for years (Berle and Means 1932).1 On the one hand, public ownership generally allows managers greater
access to capital, enhanced stock-based compensation alternatives, external monitoring of the business by stakeholders, and
greater public awareness of the firm (Holderness, Kroszner, and Sheehan 1999; Gomes 2000; Chemmanur and He 2011). On
the other hand, consistent with the Michael Dell and Elon Musk quotes above, the agency conflicts associated with disperse
ownership and the separation of ownership from control may lead to actions that are not in the firm’s long-term best interest
(Berle and Means 1932). In addition, detailed disclosure requirements that reveal corporate strategies and trade secrets to
competitors (Pagano and Röell 1998; Badertscher, Shroff and White 2013b) and regulatory costs, especially since the
implementation of the Sarbanes-Oxley Act (SOX), may hinder the long-term profitability of public firms.
Despite the importance of this issue to managers, academic research provides little insight into the effect of public versus
private ownership on future firm performance. The paucity of research is likely due to the lack of data on private firms,
especially in the U.S. In this study, we provide empirical evidence on the relative future long-term changes in profitability of
private and public firms matched on current profitability, size, growth, and industry by using data from Sageworks Inc.2
We find that public firms are associated with significantly lower future changes in operating profitability (i.e., changes in
return on net operating assets over the future three to five years) compared to matched private firms. We also find that the lower
future changes in operating profitability of public firms are associated with both lower future changes in profit margins (i.e.,
operating efficiency) and lower future changes in asset turnovers (i.e., asset utilization). These results hold for the full sample
with controls as well as for samples that are matched by employing entropy balancing (EB) and propensity score matching
(PSM). Our findings suggest that a public firm experiences lower future changes in operating profitability than a private firm
matched on current operating profitability, size, growth, and industry.
To provide insight into the driver of these differences, we examine the role that short-termism, competition, and agency
costs play in the differential future changes in operating profitability of public versus private firms. Specifically, we examine
whether the differences in future changes in operating profitability of public and private firms are associated with industry
short-termism, where short-termism indicates a firm’s tendency to take actions that maximize short-term earnings rather than
the long-term value of the corporation (e.g., Levitt 2000; Donaldson 2003).3 Utilizing the classification in Brochet, Loumioti,
and Serafeim (2015), we find that the lower future changes in operating profitability for public relative to private firms are more
pronounced in industries that are classified as short-term focused.
We also examine whether the differences in future changes in profitability between public and private firms (Berman 2011;
Dedman and Lennox 2009; Badertscher et al. 2013b) are associated with the competitiveness of the industry in which the firm
operates. We argue that required disclosures for public firms are costlier in industries that face greater competition. Consistent
with this notion, we find that the lower future changes in operating profitability of public firms relative to private firm are more
pronounced as the competitiveness of the industry in which the firm operates increases.
Next, we examine whether the lower future changes in profitability for public relative to private firms are associated with
the agency costs faced by the firm. We use two proxies for the firm’s agency costs: the level of asset turnover and sales growth.
Prior research (e.g., Ang, Cole, and Lin 2000) suggests that markedly low asset turnover reflects poor investment decisions and/
or the consumption of perquisites by managers, which leads to lower firm productivity. Similarly, extreme low sales growth
reflects management’s lack of effort in growing the business. Consistent with the notion that agency costs drive the documented
differences between public and private firms, we find that the lower future changes in operating profitability of public firms
relative to private firms are more pronounced for firms with higher agency costs (i.e., extreme low current asset turnover and
low current sales growth).
Finally, we examine whether the differences in future changes in operating profitability of public and private firms are
associated with the transient institutional ownership of the public firms. Bushee (2001) finds that transient institutional owners
1
Discussions regarding the costs and benefits of public ownership have recently come to the front pages of business press articles and magazines due to
Elon Musk’s, the CEO of Tesla, Inc., tweet on August 7, 2018, ‘‘Am considering taking Tesla private at $420. Funding secured.’’ Mr. Musk had
discussed the idea of a private Tesla before in an interview with Rolling Stone published in November 2017. In that interview he said having to answer
to public shareholders ‘‘makes [Tesla] less efficient.’’
2
We are primarily interested in future long-term changes in profitability between public and private firms since we match private and public firms on
current profitability. We therefore do not expect significant differences in the near-term profitability across firms. However, throughout the manuscript
we refer to changes in profitability instead of long-term changes in profitability for the sake of brevity.
3
Other researchers (e.g., Laverty 2004; Edmans, Goldstein, and Wei 2009; Asker, Farre-Mensa, and Ljungqvist 2014) have labeled this tendency
‘‘managerial myopia,’’ defined as the tendency for companies to take actions that overvalue short-term rewards and undervalue long-term consequences.
Managerial myopia is usually attributed to short-sighted decision making by managers due to the pressures of the stock market. For simplicity, we refer
to actions that overvalue short-term rewards and undervalue long-term consequences as short-termism throughout the paper and do not make a
distinction between short-termism and managerial myopia.
Journal of Management Accounting Research

Volume 32, Number 2, 2020
Private versus Public Corporate Ownership: Implications for Future Changes in Profitability 29
focus on near-term earnings, suggesting that the differences in future changes in profitability between public and private firms
may be exacerbated for public firms with significant transient institutional ownership. In addition, Asker et al. (2014) find
evidence that public firms with high transient ownership have lower investment sensitivity to opportunities relative to public
firms with low transient ownership. We find that the lower future changes in operating profitability of public firms relative to
private firms are more pronounced for public firms with a high percentage of transient institutional ownership. This result is
consistent with public pressure to focus on near-term performance being associated with lower future changes in performance.
The results of our study provide important insights to managers and contribute to the literature on the effect of ownership
structure on firm performance. Prior research examines the relation between current profitability and the diffusion of ownership
within public firms (Demsetz and Lehn 1985; Demsetz and Villalonga 2001); however, the research finds no significant
association between ownership diffusion and profitability. Other research examines the relation between public versus private
ownership, which also captures differential ownership diffusion and long-term profitability. However, this research also finds
mixed evidence (Akgue, Choi, and Kim 2015; Coles, Lemmon, and Naveen 2013; Ke, Petroni, and Safieddine 1999) and is
limited to the insurance industry, survey data, and foreign economies.
Prior research also examines firm performance around capital infusion events. The research documents a decrease in
profitability after an IPO (Pagano, Panetta, and Zingales 1998; Jain and Kini 1994; Mikkelson, Partch, and Shah 1997) or
reverse leverage buyout (Degeorge and Zeckhauser 1993), and attributes the profitability decrease to managers timing the IPO/
leverage buyout when the firm’s market-to-book ratio and profitability are high and unsustainable. Other research (Gao, Hsu,
and Li 2014; Bernstein 2015; Babina, Ouimet, and Zarutskie 2016) finds a decrease in corporate innovation, exploration, and
retention of key initial employees around IPOs. We contribute to this literature by comparing the future changes in operating
profitability of a sample of public and private firms matched on current profitability, size, growth, and industry outside of a
significant capital event (e.g., IPO or reverse leverage buyout).
This study also contributes to the debate on economic short-termism. Managerial short-termism has been blamed for the
economic malaise that has affected the U.S. for several decades (Laverty 1996) and for playing a significant role in the recent
financial crisis (Bair 2011). While prior research examines short-termism and its effect on corporations, the evidence is limited
(Kraft, Vashishtha, and Venkatachalam 2018). Analytical research demonstrates that less frequent reporting could limit
managerial short-termism (Gigler, Kanodia, Sapra, and Venugopalan 2012), suggesting that private firm managers, who
arguably face fewer reporting requirements than public firms, may be less short-term focused. We provide evidence consistent
with short-termism, and with this analytical finding, by documenting that the relatively lower future changes in operating
profitability of public firms versus private firms are associated with the short-term orientation of the industry.
Finally, our paper contributes to the emerging literature on private firms. Burgstahler, Hail, and Leuz (2006) and Hope,
Thomas, and Vyas (2013) find less earnings management by public firms, suggesting that the disciplining force of financial
reporting dominates the incentive to meet expectations in the capital market. Asker et al. (2014) and Badertscher,
Shanthikumar, and Teoh (2019b) find that private firms make more investments as a percentage of assets than public firms, and
Badertscher et al. (2013b) show that information about public firms spills over to affect the investments of private firms. We
contribute to this body of research by examining fundamental differences in the future changes in operating profitability
between public and private firms. While the prior research documents that private firms make more investments and are more
responsive to investment opportunities than public firms, it does not address whether these investments lead to greater future
changes in profitability. Our study provides insight on this more fundamental question.
The remainder of the paper proceeds as follows. In Section II we review the literature and develop our hypotheses. Section
III describes our research design, and Section IV describes the sample selection and presents descriptive statistics. Section V
presents the results of our empirical tests. Section VI concludes the paper with a summary of our results and a discussion of
their implications.
II. BACKGROUND AND HYPOTHESES
Background
Understanding the implications of public ownership is important for managers in making the fundamental decision as to
whether to be a public or private firm. In addition, understanding how public versus private ownership affects firm performance
has arguably become more important over time as regulatory costs, required disclosures (Brau and Fawcett 2006; Leuz,
Triantis, and Wang 2008), and the market pressure to meet earnings targets (Hough 2011) faced by public firms increase.
Despite the interest and importance of understanding the effect of public versus private ownership on firm performance, a
lack of data on private firms in the U.S. has led to limited research on this issue. Some research has examined the association
between public ownership and firm performance by examining the performance of firms after an IPO. For example, Pagano et
al. (1998) find a reduction in the profitability of firms after an IPO for a sample of Italian firms. Jain and Kini (1994) find a

reduction in operating profitability after an IPO for a sample of U.S. firms. Mikkelson et al. (1997) find reduced profitability
from prior to the IPO to the end of the first year after the public offering for a sample of U.S. firms, but find no further decline in
profitability for the ten years after the public offering. Degeorge and Zeckhauser (1993) find a reduction in firm performance
after firms go public through a reverse leveraged buyout. These studies attribute the decrease in profitability around public
offerings to high market-to-book ratios and high profitability that are unsustainable prior to the offering.
Bernstein (2015) indirectly explores future changes in profitability of IPOs by examining the effect of the transition to
public equity markets on firm innovation by focusing on firm patenting behavior around the IPO event. He finds that the quality
of innovation deteriorates in the years around the IPO. In fact, the decline starts two years before the IPO event and continues in
the five years thereafter. A more direct empirical comparison of future changes in profitability between private versus public
firms, without a significant inflow of capital surrounding an IPO, could provide insight into this issue. However, difficulty in
obtaining private firm data has likely led to a lack of research in this area.
Some prior studies overcome the data problem by focusing on regulated industries, such as banking and insurance firms, or
using data collected from surveys of private firms. For example, Ke et al. (1999) perform a univariate comparison of a sample
of 45 privately held property-liability insurers and 18 publicly held property-liability insurers, and detect no significant
difference in profitability between public and private firms. However, this analysis examines a small, unbalanced sample of
firms within one industry. Using the Forbes survey of the 500 biggest private firms in the U.S., Coles et al. (2013) find that
private firms are less profitable than public firms. However, Coles et al. (2013) use Forbes estimated data and do not employ a
matched pair research design. We contribute to this literature by presenting empirical evidence on differences in future changes
in operating profitability between a sample of private and public firms matched on current profitability, size, growth, and
industry in a cross-section of industries over multiple years.
Hypothesis Development
The public corporation is believed to have numerous advantages over its private counterpart (Renneboog, Simons, and
Wright 2007). For example, public firms are likely to have greater access to capital, greater publicity, and an increased
reputation (Chemmanur and He 2011). Public firms also have increased ability to use stock price-based compensation
(Holderness et al. 1999) and greater external monitoring (Gomes 2000). These advantages of public ownership have the
potential to increase investment opportunities without increased indebtedness, attract the best managerial talent, and lead to an
enhanced reputation relative to what would be possible if the firm were private. These factors could result in public firms
outperforming private firms in terms of future changes in profitability.
However, there are reasons that public firms may be less profitable in the long term than private firms. The diffuse
ownership and separation of ownership from control potentially create agency costs such that the actions of managers are not
necessarily in the firm’s long-term best interest (Fama 1980; Fama and Jensen 1983). Additionally, public ownership requires
disclosure of firm information, which could be used strategically by current and potential rivals (Pagano and Röell 1998;
Maksimovic and Pichler 2001). In fact, in a survey of CFOs, Brau and Fawcett (2006) find that ‘‘disclosing information to
competitors’’ is one of the most important reasons why private firms remain private.
The costs of complying with regulatory requirements could also diminish the competitiveness and long-term profitability
of public firms relative to private firms. Research documents that the propensity for firms to go private spiked after SOX
(Engel, Hayes, and Wang 2007; Kamar, Karaca-Mandic, and Talley 2009; Leuz et al. 2008). Specifically, Leuz et al. (2008)
document that an increasing number of firms chose to ‘‘go dark’’ (i.e., deregister their common stock) after SOX: 370 from
2002 through 2004 versus 114 from 1998 through 2001. CFOs surveyed by Brau and Fawcett (2006) argue that significant
expenses associated with listing requirements imposed by securities exchanges, SEC rules and regulations, and accounting
requirements for public firms, estimated more than a decade ago at over a million dollars annually, affect long-term profitability
(Hartman 2006). Consistent with public ownership being costly, Banks (2014) notes that there is ‘‘an accelerating trend of
businesses walking away from the stock markets.’’
In summary, there are valid reasons to expect public ownership to enhance a firm’s performance and many credible
arguments to suggest that public ownership may hinder profitability. Therefore, we state our first hypothesis in null form:
H1: There are no differences in the future changes in operating profitability of public firms relative to private firms.
Operating profitability, defined as return on net operating assets, is a multiplicative function of the firm’s profit margin, or
operating efficiency, and asset turnover, or asset utilization (Fairfield and Yohn 2001). Public ownership could affect the two
components of profitability differentially. Future operating efficiency, or profit margin, could be higher for public firms as a
result of the greater publicity. Customers may view public firms’ status as a sign of quality and, therefore, be willing to pay
more for their products. Additionally, Atanassov, Nanda, and Seru (2007) document that firms with an infusion of arm’s length
financing in the form of a seasoned equity offering are associated with an increase in innovative activity (i.e., the number of

citations per patent) within two years after the influx of capital. This increase in innovative activity could lead to higher profit
margins for these public firms.
However, public firms face increasingly costly regulatory requirements that could diminish their competitiveness
(Badertscher, Jorgensen, Katz, and Kinney 2014) and, therefore, their profit margin.4 Also, the increased disclosure
requirements for public firms are likely to expose information on margins to competitors (Berman 2011; Badertscher et al.
2013b). This suggests that public ownership might lead to greater competition in high margin products, which may, in the long
run, lead to lower margins for public firms relative to private firms. Finally, Gao et al. (2014), Bernstein (2015), and Babina et
al. (2016) examine the effect of public and private ownership on corporate innovation, exploration, and retention of key initial
employees, especially around the IPO, and find that public firms lose key elements associated with differentiation that could
harm their future margins relative to private firms.5
Asset turnover could also differ between public and private firms. Public firms could experience higher asset turnover if
they have greater access to capital and invest the capital in positive net present value projects that incrementally generate more
sales. However, public firms could also experience lower asset turnover if they overinvest in projects with the influx in capital.
Prior research suggests that public firms have the potential to overinvest because of the greater access to capital (Titman, Wei,
and Xie 2004), underinvest to ensure that the firm’s earnings meet analyst expectations (Graham, Harvey, and Rajgopal 2005),
or choose less profitable investments with shorter time horizons (Poterba and Summers 1995). Asker et al. (2014) examine
differences in investment between public and private firms and find that public firms invest substantially less and are less
responsive to changes in investment opportunities. Suboptimal investments would lead to lower future long-term asset turnover
for public firms relative to private firms. Given the uncertainty of the nature and strength of the potential effects of private
versus public ownership on the components of profitability, we state our second hypothesis in null form:
H2: There are no differences in the future changes in profit margin and/or asset turnover of public firms relative to private
firms.
We also provide hypotheses on what drives the differential future changes in profitability between public and private firms.
Many have argued that public corporations exhibit short-termism, a tendency to take actions that maximize short-term earnings
and stock prices rather than the long-term value of the corporation (e.g., Dell 2014; Levitt 2000; Donaldson 2003). Consistent
with the assertion that public firms exhibit short-termism, Warren Buffett has demonstrated a preference for investments in
private firms because of the short-termism associated with public ownership. In a discussion of Warren Buffett’s letter to
Berkshire Hathaway Inc. shareholders, Hough (2011) states that ‘‘Wall Street’s short-sighted focus on stock earnings hinders
firm performance, whereas private companies are free to prosper.’’ Google (2004) highlights a similar notion prior to its IPO
that ‘‘outside pressures too often tempt [public] companies to sacrifice long-term opportunities to meet quarterly market
expectations.’’
Some have argued that organizing as a private firm avoids demands from short-term oriented investors (Stein 1988).6
Beatty, Ke, and Petroni (2002) find evidence consistent with this notion. They compare publicly and privately held banks and
find evidence consistent with public bank managers facing more pressure than private bank managers to report earnings in line
with expectations. In addition, private firms may be more willing to engage in book-tax conforming tax strategies that reduce
both book and taxable incomes than public firms, since public firms are typically subject to greater capital market pressure to
focus on book income (e.g., Penno and Simon 1986; Cloyd, Pratt, and Stock 1996; Mills and Newberry 2001; Badertscher,
Katz, and Rego 2013a; Badertscher, Katz, Rego, and Wilson 2019a). Taken together, both market pressure and book-tax
conformity influence the greater short-term focus of public versus private firms. Prior research (Brochet et al. 2015) suggests
that industries differ in terms of having a short-term versus long-term orientation. We argue that if managers of public firms are
susceptible to short-termism, the differential future changes in operating profitability of public firms versus private firms are
likely associated with the short-term orientation of the industry in which the firms operate.
Some argue that public firms’ required disclosures about their products and profitability could aid their competitors and
potential rivals (Ellis, Fee, and Thomas 2012). These disclosures could therefore make it more difficult for public firms to
compete (Wagenhofer 1990; Botosan and Stanford 2005). Competition should drive rates of return to converge within an
industry over time, and the rate of convergence should be faster in more competitive industries (Mueller 1977). We, therefore,
4
We address the costs associated with having financial statements audited as an alternative explanation for the differences in profitability later in an
additional analysis.
5
We note that this finding of reduced innovation around initial public offerings is not necessarily inconsistent with the finding of increased innovation
around seasoned equity offerings for public firms (Atanassov et al. 2007), as the former reflects an analysis of private firms that become public, while
the latter reflects a time-series analysis of public firms around an additional equity offering.
6
Charles Koch, chief executive of Koch Industries Inc., the United States’ second-largest private firm, claims that executives that obsess about delivering
those ‘‘ever-increasing and predictable quarterly earnings’’ are ‘‘going to sacrifice long-term value’’ in the end (Shlaes 2007).

argue that the required disclosures for public firms could lead the differential future changes in profitability of public versus
private firms to be associated with the competitiveness of the firm’s industry.
Finally, some argue that the diffuse ownership and separation of ownership from control potentially create agency costs for
public firms. These agency costs may lead managers to take actions that are not necessarily in the firm’s long-term best interest
(Fama 1980; Fama and Jensen 1983). We therefore argue that the lower future changes in profitability are likely associated with
agency costs faced by the firm.
While the theory and evidence above suggest that differential future changes in profitability are associated with short-
termism, competition, and agency costs, the uncertainty of the initial association leads us to state our third hypothesis in null
form:
H3: The differential future changes in operating profitability of public and private ownership are not associated with the
short-termism, competition, and/or agency costs faced by the firm.
III. RESEARCH DESIGN

We are interested in examining whether public firms have differential future changes in operating profitability relative to
private firms, after controlling for current profitability, size, and sales growth. We include controls (as well as match on these
controls using the EB and PSM procedures) for profitability, size, and growth to better align the public and private firms at a
particular point in the firm’s life cycle. Therefore, we examine whether a public firm with similar current profitability, size, and
growth as a private firm experiences different future changes in operating profitability.7
To examine our first two hypotheses regarding differences in future changes in profitability between public and private
firms, we estimate the regression model shown in Equation (1).
DVtþi ¼ a0 þ a1 PUBLIC þ a2 RNOAt þ a3 NOAt þ a4 SALES GRt þ a5 LOSSt þ a6 ATOt þ a7 PMt þ et ð1Þ
The dependent variable (DV) is the future change in profitability metric of interest. We initially examine the future change
in return on net operating assets, measured as DRNOAtþ1, DRNOAtþ3, and DRNOAtþ5, as our DVs.8 DRNOA is calculated as net
operating income (before any financing costs or investment income) in period tþi divided by average net operating assets
(operating assets net of operating liabilities) in periods tþi and tþi1 less net operating income in period t divided by average
net operating assets in periods t and t1.9,10 This is consistent with prior research (e.g., Fairfield, Ramnath, and Yohn 2009).
We also evaluate the components of our future changes in profitability metric of interest; namely, future changes in profit
margin, measured as DPMtþ1, DPMtþ3, and DPMtþ5 and future changes in asset turnover, measured as DATOtþ1, DATOtþ3, and
DATOtþ5. DPM is the change in firm profit margin and equals net operating income in period tþi divided by sales in period tþi
less net operating income in period t divided by sales in period t. DATO is the change in asset turnover, defined as sales in
period tþi divided by average net operating assets in periods tþi and tþi1 less sales in period t divided by average net
operating assets in periods t and t1. The variable PUBLIC is an indicator variable that is equal to 1 when the firm is a public
firm, and 0 otherwise. The coefficient of interest is a1, particularly in the regressions on DVtþ3 and DVtþ5, (i.e., the future
changes in profitability metrics).11
We control for current profitability, size (net operating assets), sales growth, and components of profitability. Consistent
with prior research on forecasting profitability (e.g., Fairfield and Yohn 2001), to control for regression toward the mean in
profitability over time, we control for current profitability (RNOA) even after matching on current profitability. Fama and
7
Our research design is not intended to address whether all private firms are more profitable than public firms (or vice versa); rather, given a public and
private firm that exhibit similar current profitability, size, and growth characteristics, we examine whether these similar public and private firms exhibit
differences in future changes in operating profitability.
8
We note that future profitability can be expressed as RNOAtþ1 ¼ RNOAt þ DRNOAtþ1. Given that RNOAt is known at the beginning of tþ1, the only
unknown component of RNOAtþ1 is DRNOAtþ1. Therefore, after controlling for current RNOA, explaining future RNOA is equivalent to explaining the
future change in RNOA. We therefore appropriately test our hypotheses using DRNOAtþ1, DRNOAtþ3, and DRNOAtþ5 as the dependent variables.
9
Operating income equals sales minus cost of sales, overhead, payroll, rent, advertising, and depreciation and amortization. Net operating assets equal
stockholders’ equity minus cash and short-term investments plus interest plus debt in current liabilities plus long-term debt.
10
As a robustness check, we also measure DRNOAtþ3 (tþ5 ) as the average of RNOA over years tþ1, tþ2, and tþ3 (tþ1, tþ2, tþ3, tþ4, and tþ5) minus
RNOAt. Our results are quantitatively similar.
11
To investigate whether Sageworks tends to exclude poorly performing firms, we test whether the firms that drop out of the sample have lower RNOA
than firms that remain in the sample for a longer period of time by comparing RNOAtþ1 for firms that drop out of the sample in year tþ2 versus RNOAtþ1
for firms that remain in the sample for at least two additional years (a total of at least four consecutive years). The mean and median RNOAtþ1 of the
two-year sample is not statistically different from the mean and median of RNOAtþ1 of the four-year sample. Thus, it appears that Sageworks does not
drop poorly performing firms. Rather, it appears that the dropping and adding of firms in the Sageworks database is more a function of how Sageworks
collects data than specific survivorship issues.

French (2000) examine mean reversion in profitability and conclude that ‘‘mean reversion is faster when profitability is below
its mean and when it is far from its mean in either direction.’’ Thus, in explaining changes in profitability, we control for the
previous level of profitability.
We control for firm size (NOA) because we expect larger firms to be associated with higher future changes in profitability
due to their access to capital and the benefits associated with economies of scale (Silberston 1972). Conversely, Monsen and
Downs (1965) suggest that the bureaucratic structure of large firms results in suboptimal future performance. If so, size will be
negatively associated with future changes in profitability. We include growth (SALES_GR) and whether the firm is currently
experiencing a profit or loss (LOSS) to control for differences in future changes in profitability due to differences in the firm’s
life-cycle stage. Finally, we control for the components of current profitability because profit margin and asset turnover measure
different aspects of a firm’s current operating profitability.12
To provide insight into H3, we include an indicator variable to capture the factor of interest. We examine the regression
model shown in Equation (2) below:
DRNOAtþi ¼ b0 þ b1 PUBLIC þ b2 Xt þ b3 PUBLIC Xt þ b4 RNOAt þ b5 NOAt þ b6 SALES GRt þ b7 LOSSt
þ b8 ATOt þ b9 PMt þ et ð2Þ
X is an indicator variable that captures firms in short-term oriented industries (STF), firms in more competitive industries
(HIGHCOMP), or firms with greater agency costs (AGENCY1 and AGENCY2). The STF classification is based on the
designation of an industry being short-term focused by Brochet et al. (2015) and captures public firms in the electronic
equipment, computer, business services, supplies, and wholesale industries.
HIGHCOMP captures firms in relatively more competitive industries. We measure industry competition using the
Herfindahl index, measured as the square of firm sales (private firms from Sageworks and public firms from Compustat) scaled
by aggregate industry sales summed over private firms from Sageworks and public firms from Compustat in the industry for the
year. Lower values of the Herfindahl index indicate more competitive industries. Therefore, HIGHCOMP is defined as 1 when
a firm’s industry Herfindahl index is less than the median Herfindahl index across all industries for the year, and 0 otherwise.
We note that because the Brochet et al. (2015) measure and the Herfindahl measure rely only on industry classification, which
is available for both public and private firms, all firms can be classified in the analyses regardless of ownership structure.
AGENCY1 captures firms with low asset turnover, while AGENCY2 captures firms with low sales growth. Ang et al. (2000)
argue that a low asset turnover reflects agency costs, as the low productivity of assets suggests that managers are making poor
investment decisions and/or are potentially exploiting the use of perquisites. Ang et al. (2000) also assert that low sales growth
reflects agency costs, as it suggests that managers are putting little effort into growing the business.13 AGENCY1 (AGENCY2)
captures firms in the lowest quartile of asset turnover (sales growth) for the current year.14 We also include an interaction term
between X and PUBLIC (i.e., PUBLIC X). This interaction term captures public firms in industries that are classified as short-
term focused, firms in industries that are more competitive, or firms that face greater agency costs. The coefficients of interest
are b1 and b3. All variables are defined in Appendix A.
IV. SAMPLE SELECTION
Sample Selection
Our dataset combines data on private firms obtained from Sageworks Inc., a firm that collects private firm data and
develops financial analysis tools, with public firms obtained from Compustat. The Sageworks database was designed to assist
accounting firms and banks performing analytical procedures and ratio analyses on private clients with benchmarking. To
conduct such analyses, Sageworks users input their clients’ financial statement information into the Sageworks system, which
then becomes part of the collective database used in our study. As a result, Sageworks obtains financial statement information
directly from the private firms’ auditors or banks and not from the private firms themselves.
12
We note that RNOA, as well as ATO and PM, can be included the regression simultaneously given that the relation between ATO and PM is a
multiplicative, not additive, function to derive RNOA.
13
Ang et al. (2000) also suggest that a low profit margin captures agency costs because it suggests that managers are not effectively controlling operating
expenses. However, we do not use the level of profit margin as a proxy for agency costs, as prior research (Fairfield and Yohn 2001) suggests that the
level of profit margin can also be inflated by earnings management.
14
AGENCY1 (AGENCY2) differs from the continuous asset turnover and sales growth measures examined in our main analyses. The dichotomous
measures capture firms that have extremely low asset turnover (sales growth) such that managers are potentially exploiting perquisites and/or putting
little effort into the business. Consistent with the dichotomous measures capturing different constructs than the continuous measures, the univariate
correlations between the dichotomous and continuous variables of asset turnover and sales growth are relatively low at 0.1301 and 0.1814,
respectively.

TABLE 1
Sample Selection and Distribution
Panel A: Private Firm Sample Selection Process

Sample Selection (2001–2010) Private Public
Initial Sample of U.S. Firms 439,517 110,710
Eliminate observations that fail to satisfy basic accounting identities (6,513) 0
Eliminate firms in Utilities, Finance, and Insurance industries (8,283) (3,528)
Eliminate firms with missing financial data to compute necessary variables (323,236) (80,280)
Eliminate observations that are not based on Audited, Compiled, or Reviewed financial statements (64,071) 0
Eliminate observations with annual sales and assets less than $100,000 (29,487) 0
Firm-year observations 7,927 26,902
Firms 4,366 4,994
(continued on next page)
Sageworks is similar to Compustat in that it contains accounting data from the income statement and balance sheet. In
addition to financial information, the private firm’s four-digit NAICS industry code, legal form (e.g., S-Corp, C-Corp,
partnership, or limited liability), fiscal year-end, state, and type of audit report (e.g., compilation, review, tax return, or audit)
are also available. The auditors that utilize the Sageworks software include most national mid-market accounting firms as well
as hundreds of regional audit firms. Unlike Compustat, Sageworks exclusively covers private firms and all data are held
anonymously so that no individual firm can be identified. Firms leave the Sageworks database due to mortality or switching to
an auditing firm that does not utilize the Sageworks software. Sageworks has a dedicated staff of accounting and programming
specialists who review, examine, and monitor the data on a continuous basis.
To construct our initial sample of private firms, we follow a similar process as Minnis (2011) and exclude all non-U.S.
based firms as well as observations with data quality issues. Specifically, we delete all firm-years that fail to satisfy basic
accounting identities as well as firm-years for which net income (NI), cash flow from operations (CFO), accruals (ACC), or
property, plant, and equipment (PPE) are greater than total assets at year-end. We also require firms to have assets and sales
greater than $100,000 and to be of legal C-Corp form to ensure comparability to public firms.
To be included in the sample of public firms, a firm must have non-missing amounts of assets, sales, and net income, be
incorporated in the U.S., and have equity that is publicly traded. Finally, to be consistent with prior literature, we also exclude
from both the public and private samples financial firms (NAICS 52) and regulated utilities (NAICS 22). Both the public firm
and private firm samples cover the period from 2001 (the beginning of the Sageworks database) through 2010, yielding a ten-
year panel of data.15 The combination of these two datasets as described constitutes our initial sample using the entire cross-
section of data available.
Our hypotheses involve comparing the future changes in operating performance of public and private firms over a variety of
time horizons, with the emphasis on long-term changes in performance (i.e., year tþ3 and year tþ5). Since our main analyses focus
on the change in return on net operating assets, which requires data in year t1 to calculate, we first require all firms to have at
least five years of consecutive data (year t1, year t, and three years of consecutive data starting after year t) to allow us to
examine year tþ3 results. This restriction, along with the data restrictions mentioned above, leads to our full sample (see Table 1,
Panel A) of 7,927 private firm-years (4,366 firms) and 26,902 public firm-years (4,994 firms) with at least five consecutive years
of available data.16
15
Given our sample period, the implementation of SOX could affect the long-term profitability of public firms relative to private firms. While this is
consistent with our hypothesis, we note that SOX itself is not likely to be the primary driver of our results. Arguably, the costliest component of SOX is
the implementation of the Section 404(b) requirements, which requires the audit of internal controls over financial reporting for accelerated filers (e.g.,
firms with market float . $75M). This requirement was effective after November 15, 2004. Our matched and entropy balanced samples consist
predominantly of small firms, which are not subject to Section 404(b). Specifically, less than 10 percent of our matched public firms are subject to
Section 404(b) requirements. In addition, if we exclude firms with market float greater than $75M (and their respective matches), our results are
quantitatively similar.
16
The requirement of five years of private firm data restricts the Sageworks sample relative to other papers using these data (e.g., Hope et al. 2013; Asker
et al. 2014). However, this is by design because the presence of these time-series data is essential to examine our hypotheses related to long-term
changes in profitability. Using profitability measures three to five years into the future creates greater potential for attrition and selection. As a result, we
also re-ran our analysis using the tþ5 sample and our results are quantitatively similar.

TABLE 1 (continued)
Panel B: Sample Distribution by Fama-French Industry of Private and Public Firms
Fama French Difference
Industry Code Fama-French Industry Name Private Public in Percent
1 Agriculture 82 1.0% 174 0.6% 0.4%
2 Food Products 112 1.4% 553 2.1% 0.6%
3 Candy and Soda 9 0.1% 235 0.9% 0.8%
4 Beer and Liquor 0 0.0% 0 0.0% 0.0%
5 Tobacco Products 0 0.0% 43 0.2% 0.2%
6 Recreation 121 1.5% 317 1.2% 0.3%
7 Entertainment 75 0.9% 510 1.9% 0.9%
8 Printing and Publishing 117 1.5% 628 2.3% 0.9%
9 Consumer Goods 106 1.3% 981 3.6% 2.3%
10 Apparel 14 0.2% 454 1.7% 1.5%
11 Healthcare 45 0.6% 563 2.1% 1.5%
12 Medical Equipment 25 0.3% 1,347 5.0% 4.7%
13 Pharmaceutical Products 5 0.1% 1,007 3.7% 3.7%
14 Chemicals 75 0.9% 655 2.4% 1.5%
15 Rubber and Plastic Products 0 0.0% 0 0.0% 0.0%
16 Textiles 23 0.3% 105 0.4% 0.1%
17 Construction Materials 498 6.3% 801 3.0% 3.3%
18 Construction 2,369 29.9% 1,528 5.7% 24.2%
19 Steel Works Etc. 205 2.6% 674 2.5% 0.1%
20 Fabricated Products 73 0.9% 291 1.1% 0.2%
21 Machinery 211 2.7% 978 3.6% 1.0%
22 Electrical Equipment 28 0.4% 272 1.0% 0.7%
23 Automobiles and Trucks 53 0.7% 229 0.9% 0.2%
24 Aircraft 9 0.1% 212 0.8% 0.7%
25 Shipbuilding, Railroad Equipment 21 0.3% 55 0.2% 0.1%
26 Defense 0 0.0% 0 0.0% 0.0%
27 Precious Metals 4 0.1% 333 1.2% 1.2%
28 Non-Metallic and Industrial Metal Mining 44 0.6% 307 1.1% 0.6%
29 Coal 19 0.2% 231 0.9% 0.6%
30 Petroleum and Natural Gas 9 0.1% 716 2.7% 2.5%
31 Utilities 0 0.0% 0 0.0% 0.0%
32 Communication 45 0.6% 1,187 4.4% 3.8%
33 Personal Services 185 2.3% 278 1.0% 1.3%
34 Business Services 459 5.8% 1,170 4.3% 1.4%
35 Computers 9 0.1% 582 2.2% 2.0%
36 Electronic Equipment 40 0.5% 2,178 8.1% 7.6%
37 Measuring and Control Equipment 0 0.0% 0 0.0% 0.0%
38 Business Supplies 154 1.9% 357 1.3% 0.6%
39 Shipping Containers 39 0.5% 71 0.3% 0.2%
40 Transportation 136 1.7% 909 3.4% 1.7%
41 Wholesale 1,261 15.9% 1,123 4.2% 11.7%
42 Retail 1,091 13.8% 2,707 10.1% 3.7%
43 Restaurants, Hotels, Motels 67 0.8% 459 1.7% 0.9%
44 Banking 0 0.0% 0 0.0% 0.0%
45 Insurance 0 0.0% 0 0.0% 0.0%
46 Real Estate 32 0.4% 1,178 4.4% 4.0%
47 Trading 0 0.0% 245 0.9% 0.9%
48 Almost Nothing 57 0.7% 259 1.0% 0.2%
7,927 100% 26,902 100%
Bold indicates significantly different at the 10 percent level.

Table 1, Panel B, lists the number of firms in each of the 48 Fama-French industries for our full sample of public and
private firms, as well as the percentage of the sample in each industry. The largest percentage of private firms are in the
‘‘Construction’’ industry followed by the ‘‘Wholesale’’ industry. The only three industries with a significant difference in the
percentage of private and public firms in the industry are ‘‘Construction Materials,’’ ‘‘Electronic Equipment,’’ and ‘‘Wholesale.’’
Overall, the distribution of public and private firms across industries is quite similar. For example, 1.5 percent of private firms
are in the ‘‘Recreation’’ industry, while 1.2 percent of public firms are in the ‘‘Recreation’’ industry. The difference in the
percentage of 0.3 percent is statistically insignificant.
Matching Procedures
Given that future changes in profitability are likely associated with the firm’s current characteristics, we match our sample
of private and public firms on current profitability, size, and growth. We use entropy balancing (EB) (Hainmueller 2012;
McMullin and Schonberger 2018) and propensity score matching (PSM) (Shipman, Swanquist, and Whited 2016) to address
systematic covariate imbalance (i.e., differences in observables on one or more distributional moments). While both EB and
PSM target covariate balance across treatment and control samples, the methods differ in how they assign weights to the control
sample (McMullin and Schonberger 2018). PSM specifies a first-stage treatment model and then matches observations on the
resulting propensity score, assigning a weight of either 1 (matched) or 0 (excluded) to each control observation. In contrast, EB
solves a constrained optimization to identify continuous weights for the control sample while keeping weights as close to
equally weighted as possible.
To perform our EB and PSM analyses, we first restrict the sample of public firms to those that are no larger than four times
the size of the biggest private firm, essentially truncating the public sample in terms of size. We do this so that we can
successfully balance on size for both analyses. For EB, we then apply the technique from Hainmueller (2012) on our
independent variables (i.e., RNOA, NOA, SALES_GR, PM, ATO, and LOSS).17 Given these inputs, the EB technique uses an
iterative algorithm to identify a weight for each observation in the control sample, such that the weighted control sample meets
the balance constraints for the covariates. We specify to entropy balance on the mean and standard deviation.
To obtain a matched sample using PSM we utilize observables, such as return on net operating assets, sales growth, profit
margin, asset turnover, whether the firm reported a loss, and the size of the firm, to model the likelihood of a firm’s choice to be
public. Specifically, we estimate the following logistic propensity score model:
PUBLICit ¼ d0 þ d1 RNOAit þ d2 SALES GRit þ d3 PMit þ d4 ATOit þ d5 LOSSit þ d6 LOGATit þ Rt bt YEARt
þ Rkck INDUSi þ ei;t ð3Þ
Equation (3) is based on models of the public and private ownership choice as in Ball and Shivakumar (2005), Givoly,
Hayn, and Katz (2010), Badertscher et al. (2014), and Opler and Titman (1993). PUBLIC equals 1 if the firm is a private firm,
and 0 otherwise. Return on net operating assets (RNOA), sales growth (SALES_GR), profit margin (PM), and asset turnover
(ATO) are proxies for performance.18 Controlling for growth at this stage (i.e., SALES_GR) is particularly important because we
may observe future changes in profitability differences that are due to differences in firm life-cycle stages, as opposed to
underlying differences in private and public firm profitability.
The indicator variable for loss firms (LOSS) is a measure of profitability. The natural logarithm of total assets (LOGAT) is a
proxy for firm size. To rule out industry and fiscal year as drivers of our results, after estimating Equation (3), we perform
within-fiscal year and industry (four-digit NAICS code) match-control group analyses by matching with replacement the
‘‘nearest neighbor’’ private firm to a public firm and applying a caliper restriction of 3 percent (see Angrist and Pischke 2009).
This matching process results in 511 firm-year observations for both samples.19 Results from the propensity score model are
presented in Appendix B.20
17
The technique using Stata is available on his website: http://web.stanford.edu/;jhain/index.htm.
18
We match on current profitability in the propensity score model to ensure that the public and private firms have similar current profitability in order to
test whether public versus private firms have different future changes in profitability. We also include current profitability in the main regression model
because of the importance of the current level of profitability in predicting firms’ future changes in profitability.
19
The 511 firm-years consist of 404 (277) unique private (public) firms. For instance, a firm that has seven years of consecutive data starting in 2002
would appear in our sample as having RNOAtþ3 for years 2003, 2004, and 2005 while having RNOAtþ5 for year 2003.
20
In our PSM matching procedure, we allow a public firm to repeatedly serve as a match for a private firm. That is, we perform the match with
replacement. We do this to find the best public firm match for each of our private firms. Following DeFond, Erkens, and Zhang (2016), we also
conducted our analysis using a one-to-one matching procedure without replacement. While this reduces our sample size to 668 firm-year observations
(334 private and 334 public firm-years), our untabulated results are qualitatively similar. Specifically, in our analysis of RNOA, we find a significant
negative coefficient on PUBLIC of 0.059 (t-stat: 2.33) for year tþ3 and 0.072 (t-stat: 2.07) for year tþ5. Finally, our results are quantitatively
similar if we allow a one-to-many match between private and public firms.

V. EMPIRICAL RESULTS
Descriptive Statistics
The descriptive statistics are reported in Table 2. Panel A presents descriptive statistics on our entire sample, while Panels
B and C present the EB and PSM samples, respectively. Statistics reported in Panels B and C of Table 2 suggest that our
matching procedure is effective in identifying similar public and private firms. Specifically, for the entropy balanced sample,
there is no difference in the current level of RNOA, PM, ATO, SALES_GR, ASSETS, NOA, LTDEBT, or LOSS. Therefore, we
match firms based on these key characteristics in year t and then observe how they perform in the future. Likewise, we observe
no statistical difference in the median RNOA, PM, SALES_GR, ASSETS, NOA, or LTDEBT between public and private firms for
our PSM sample. Taken together, both of our matching procedures result in firm-years with similar current operating
performance, profit margins, sales growth, assets, and long-term debt. However, they differ in their ownership structure.
In Table 2, Panels B and C we also observe that future changes in profitability, measured as average DRNOAtþ3 and
DRNOAtþ5 are significantly greater for private firms than for the matched public firms in our sample. This preliminary evidence
suggests rejection of the null hypothesis for H1 in favor of the alternative that private firms experience higher long-term
changes in profitability than public firms.
Profitability between Public and Private Firms

In our main analyses, we examine differences in long-term changes in profitability between public and private firms for the
full sample of firms, an EB sample, and a PSM sample of public firms using covariates with observable differences. Figure 1
plots the average levels of RNOA over time for our EB (Panel A) and PSM (Panel B) firms. The figures show that while both
sets of firms begin with statistically indistinguishable profitability in year t (as discussed above), they exhibit significant
differences in the level of RNOA in the following five years. The figures also suggest that while private firms generally exhibit
increasing RNOA over the next five years, the matched public companies exhibit constant to slightly decreasing profitability.
We note, however, that this graphical depiction does not include the necessary control variables to establish an association.
Regression Analyses
Differential Future Changes in Profitability
Tables 3 and 4 report the main results regarding the differences in future changes in operating profitability between our
samples of public and private firms. Panel A of Table 3 reports the results of Equation (1) to examine H1. The first three
columns present the results for the entire cross-sectional sample of public and private firms, the next three columns present the
results for the EB sample, while the last three columns present the results for the PSM sample based on the model in Equation
(3). We focus on the columns representing differences in long-term changes in profitability between public and private firms
(i.e., DRNOAtþ3 and DRNOAtþ5 ) since, by design, our match on current profitability inhibits significant differences in the near
term (i.e., DRNOAtþ1). The results from Table 3 again suggest a rejection of the null hypothesis for H1 in favor of the
alternative that public firms experience lower future changes in RNOA than private firms after controlling for current
profitability, size, growth, and industry. Specifically, we find that the coefficient on PUBLIC is negative and statistically
significant for explaining DRNOA three and five years ahead for the full, EB, and PSM samples.21 We note that PUBLIC
remains significant in year tþ5 for the rigorous PSM sample, even though the sample size decreases to only 447 firm-year
observations for DRNOAtþ5.
Given the finding above that public firms tend to have lower DRNOA on average than matched private firms, we expect to
observe differences in future changes in profit margins or changes in asset turnovers since operating profitability is a
multiplicative function of these components (Fairfield and Yohn 2001). In Table 4, we examine whether the lower future
changes in profitability experienced by public firms manifests through lower changes in profit margins, changes in asset
turnovers, or both.
Panel A and Panel B in Table 4 present the results of an examination of changes in future profit margin (DPM) and asset
turnover (DATO), respectively. The results for differences in future changes in profit margin largely mirror the earlier results for
DRNOA. Specifically, public firms have lower changes in profit margins three and five years in the future relative to private
firms for the full sample, as well as within the EB and PSM samples, of public and private firms. This is consistent with
21
We test for statistical significance of the parameter estimates by using heteroscedasticity robust standard errors in our regressions with errors clustered
by private firm and year. Since public firms can also be used multiple times in the PSM analysis, we also ran the regressions clustering by public firm
and year and observe statistically similar results.

38
TABLE 2
Descriptive Statistics and Correlations for Public and Private Firms
Panel A: Descriptive Statistics for Public and Private Firms for the Full Sample
Private Public Difference
Variable Mean Std. Q1 Median Q3 n Mean Std. Q1 Median Q3 n Mean Median
RNOA 0.143 0.668 0.209 0.100 0.398 7,927 0.114 0.326 0.034 0.117 0.232 26,902 0.028*** 0.017
DRNOAtþ1 0.004 0.462 0.138 0.000 0.121 7,927 0.001 0.192 0.050 0.000 0.048 26,902 0.003 0.000
DRNOAtþ3 0.015 0.466 0.188 0.006 0.147 7,927 0.003 0.227 0.066 0.001 0.066 26,902 0.012*** 0.007***
DRNOAtþ5 0.022 0.550 0.202 0.009 0.250 1,567 0.007 0.233 0.066 0.000 0.075 17,434 0.015 0.009
PM 0.024 0.121 0.037 0.020 0.071 7,927 0.073 0.211 0.018 0.075 0.154 26,902 0.049*** 0.055***
DPMtþ1 0.002 0.075 0.025 0.000 0.027 7,927 0.003 0.110 0.024 0.001 0.026 26,902 0.001 0.001
DPMtþ3 0.004 0.081 0.035 0.001 0.028 7,927 0.004 0.129 0.034 0.000 0.032 26,902 0.000 0.001
DPMtþ5 0.003 0.096 0.039 0.001 0.040 1,567 0.007 0.134 0.037 0.001 0.035 17,434 0.004 0.001
ATO 8.876 10.522 3.265 5.601 9.819 7,927 2.416 2.623 0.938 1.672 2.863 26,902 6.460*** 3.929***
DATOtþ1 0.231 3.787 1.123 0.034 0.800 7,927 0.013 1.323 0.168 0.023 0.243 26,902 0.244*** 0.056***
DATOtþ3 0.197 4.073 1.331 0.080 0.970 7,927 0.143 1.773 0.190 0.043 0.351 26,902 0.340*** 0.122***
DATOtþ5 0.333 4.347 1.887 0.143 1.170 1,567 0.142 1.776 0.196 0.063 0.408 17,434 0.475*** 0.207***
SALES 13.341 22.373 2.847 6.250 13.315 7,927 3141.2 8965.5 75.5 360.6 1611.9 26,902 3,127.8*** 354.4***
SALES_GR 0.106 0.242 0.023 0.071 0.196 7,927 0.127 0.265 0.014 0.087 0.220 26,902 0.021 0.016
ASSETS 12.737 285.017 1.164 2.642 5.971 7,927 4,055.6 12,121.8 90.4 448.5 2,073.3 26,902 4,042.9*** 445.8***
NOA 2.898 5.675 0.436 1.033 2.656 7,927 2,282.4 6,613.5 44.2 244.0 1,241.2 26,902 2,279.5*** 243.0***
LTDEBT 0.091 0.181 0.000 0.000 0.090 7,927 0.188 0.201 0.004 0.137 0.297 26,902 0.097*** 0.137***
LOSS 0.212 0.409 0.000 0.000 0.000 7,927 0.279 0.448 0.000 0.000 1.000 26,902 0.067*** 0.000
STF 0.245 0.430 0.000 0.000 0.000 7,927 0.242 0.428 0.000 0.000 0.000 26,902 0.003 0.000
HIGHCOMP 0.297 0.457 0.000 0.000 1.000 7,927 0.677 0.468 0.000 1.000 1.000 26,902 0.380*** 1.000***

Allee, Badertscher, and Yohn

TABLE 2 (continued)
Panel B: Descriptive Statistics for Public and Private Firms for the Entropy Balanced Sample
RNOA 0.142 0.667 0.209 0.099 0.398 7,927 0.142 0.667 0.174 0.118 0.481 12,945 0.000 0.019
DRNOAtþ1 0.004 0.467 0.137 0.002 0.121 7,927 0.023 0.393 0.258 0.000 0.151 12,945 0.027* 0.002
DRNOAtþ3 0.020 0.465 0.187 0.006 0.147 7,927 0.051 0.459 0.338 0.052 0.161 12,945 0.032** 0.046*

DRNOAtþ5 0.018 0.549 0.202 0.007 0.249 1,567 0.048 0.461 0.350 0.042 0.184 8,305 0.066** 0.049*
PM 0.025 0.122 0.036 0.020 0.071 7,927 0.025 0.122 0.008 0.037 0.088 12,945 0.000 0.017
DPMtþ1 0.008 0.159 0.053 0.004 0.060 7,927 0.002 0.074 0.024 0.000 0.026 12,945 0.006* 0.004*
DPMtþ3 0.003 0.181 0.081 0.005 0.068 7,927 0.002 0.080 0.034 0.003 0.028 12,945 0.005* 0.002
DPMtþ5 0.008 0.184 0.076 0.001 0.065 1,567 0.004 0.095 0.038 0.001 0.040 8,305 0.003 0.000
ATO 6.540 5.499 2.260 4.600 9.814 7,927 6.540 5.499 2.410 4.360 9.001 12,945 0.000 0.240

DATOtþ1 0.231 3.780 1.120 0.034 0.799 7,927 1.001 3.300 2.580 0.279 0.487 12,945 0.770* 0.246
DATOtþ3 0.196 4.074 1.330 0.079 0.969 7,927 0.876 4.131 2.820 0.368 0.545 12,945 0.680* 0.289
DATOtþ5 0.333 4.340 1.880 0.143 1.170 1,567 1.820 4.230 4.880 0.826 0.260 8,305 1.487* 0.683*
SALES 13.340 22.370 2.840 6.240 13.310 7,927 19.228 32.060 4.440 9.270 19.180 12,945 5.888* 3.030*
SALES_GR 0.106 0.241 0.023 0.071 0.196 7,927 0.106 0.241 0.032 0.081 0.232 12,945 0.000 0.010
ASSETS 12.730 48.544 1.160 4.620 9.970 7,927 13.630 23.810 3.470 6.881 13.160 12,945 0.900 2.261
NOA 2.898 5.681 0.435 1.033 2.650 7,927 2.898 5.681 1.121 2.086 3.656 12,945 0.000 1.053
LTDEBT 0.091 0.181 0.000 0.000 0.089 7,927 0.089 0.191 0.000 0.000 0.079 12,945 0.002 0.000
LOSS 0.212 0.408 0.000 0.000 0.000 7,927 0.212 0.408 0.000 0.000 0.000 12,945 0.000 0.000
STF 0.245 0.430 0.000 0.000 1.000 7,927 0.371 0.483 0.000 0.000 1.000 12,945 0.126 0.000
HIGHCOMP 0.296 0.456 0.000 0.000 1.000 7,927 0.739 0.439 0.000 1.000 1.000 12,945 0.443*** 1.000***
Private versus Public Corporate Ownership: Implications for Future Changes in Profitability
39
TABLE 2 (continued)
40
Panel C: Descriptive Statistics for Public and Private Firms for the Propensity Matched Sample
RNOA 0.100 0.322 0.223 0.088 0.288 511 0.110 0.237 0.055 0.120 0.340 511 0.010 0.032
DRNOAtþ1 0.036 0.185 0.048 0.000 0.105 511 0.009 0.145 0.062 0.000 0.051 511 0.045* 0.000
DRNOAtþ3 0.028 0.215 0.088 0.000 0.115 511 0.033 0.201 0.141 0.015 0.034 511 0.061** 0.015*
DRNOAtþ5 0.037 0.271 0.120 0.000 0.187 122 0.013 0.163 0.145 0.020 0.084 325 0.050** 0.020*
PM 0.025 0.152 0.047 0.021 0.082 511 0.038 0.186 0.035 0.056 0.091 511 0.012 0.036
DPMtþ1 0.008 0.073 0.016 0.001 0.030 511 0.011 0.138 0.017 0.002 0.020 511 0.003 0.002
DPMtþ3 0.005 0.086 0.030 0.001 0.032 511 0.018 0.134 0.048 0.012 0.002 511 0.023** 0.013*
DPMtþ5 0.008 0.089 0.029 0.000 0.052 122 0.014 0.117 0.027 0.016 0.002 325 0.021* 0.016*
ATO 7.258 9.722 2.231 4.029 7.855 511 5.163 4.940 1.966 4.189 7.129 511 2.095*** 0.160***
DATOtþ1 0.199 3.504 0.749 0.006 0.558 511 0.186 3.085 0.807 0.042 0.833 511 0.013 0.036
DATOtþ3 0.299 3.606 0.941 0.025 0.701 511 0.592 3.696 0.634 0.085 1.934 511 0.891** 0.060
DATOtþ5 0.125 3.723 1.096 0.033 0.627 122 0.912 3.897 0.418 0.085 5.740 325 1.037* 0.053
SALES 54.422 204.385 4.282 8.641 21.692 511 82.410 273.391 9.459 20.415 29.537 511 27.988* 11.774*
SALES_GR 0.083 0.190 0.019 0.072 0.175 511 0.092 0.165 0.015 0.110 0.222 511 0.009 0.038
ASSETS 111.038 1115.287 2.151 4.546 15.540 511 78.098 253.833 5.164 8.794 18.626 511 32.939 4.248
NOA 18.537 68.565 0.886 2.260 5.998 511 30.621 181.464 1.964 4.117 12.087 511 12.084 1.857
LTDEBT 0.103 0.186 0.000 0.000 0.127 511 0.101 0.166 0.000 0.000 0.184 511 0.002 0.000
LOSS 0.215 0.411 0.000 0.000 0.000 511 0.155 0.362 0.000 0.000 0.000 511 0.061** 0.000
STF 0.523 0.500 0.000 1.000 1.000 511 0.523 0.500 0.000 1.000 1.000 511 0.000 0.000
HIGHCOMP 0.695 0.461 0.000 1.000 1.000 511 0.695 0.461 0.000 1.000 1.000 511 0.000 0.000
All continuous variables are winsorized at the 1st and 99th percentiles.
All variables are defined in Appendix A.


FIGURE 1
Average Future Return on Net Operating Assets for Public and Private Firms
Panel A: Entropy Balanced
Panel B: Propensity Score Matched

42
TABLE 3
Regressions of Future Changes in Return on Net Operating Assets on an Indicator Variable for Public Firms and Financial Performance Variables
Full Sample Entropy Balance Propensity Matched Sample
DRNOAtþ1 DRNOAtþ3 DRNOAtþ5 DRNOAtþ1 DRNOAtþ3 DRNOAtþ5 DRNOAtþ1 DRNOAtþ3 DRNOAtþ5
Coeff. t-stat Coeff. t-stat Coeff. t-stat Coeff. t-stat Coeff. t-stat Coeff. t-stat Coeff. t-stat Coeff. t-stat Coeff. t-stat
Intercept 0.040 1.172 0.047 1.456 0.330 3.215 0.088 5.630 0.021 1.390 0.024 1.510 0.099 0.765 0.247 1.581 0.575 1.897
PUBLIC 0.028 1.008 0.035 1.966 0.080 2.671 0.007 1.540 0.044 7.570 0.035 3.850 0.064 1.058 0.093 2.341 0.119 2.051
RNOA 0.267 35.169 0.388 53.116 0.482 43.842 0.300 48.750 0.436 73.950 0.554 59.500 0.139 3.825 0.331 7.986 0.417 4.287
NOA 0.000 3.442 0.000 6.584 0.000 7.412 0.001 1.950 0.002 3.710 0.001 0.780 0.000 0.125 0.000 0.849 0.000 0.174
SALES_GR 0.030 4.665 0.052 8.618 0.056 7.828 0.078 7.620 0.126 12.800 0.167 12.760 0.052 1.009 0.057 1.117 0.044 0.595
LOSS 0.044 10.823 0.043 10.982 0.021 4.323 0.123 16.210 0.138 19.070 0.100 9.060 0.103 4.718 0.107 3.928 0.054 0.821
ATO 0.004 5.492 0.002 4.715 0.003 3.733 0.004 10.740 0.003 8.610 0.003 6.480 0.002 1.287 0.001 0.545 0.003 0.686
PM 0.143 12.605 0.160 14.144 0.116 8.784 0.367 18.540 0.430 22.700 0.416 16.870 0.045 0.773 0.141 1.941 0.141 1.146
Adjusted R2 15.99% 29.20% 37.61% 17.40% 36.87% 50.42% 12.76% 25.62% 30.96%
Year Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry Fixed Effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Standard Errors Yes Yes Yes Yes Yes Yes Yes Yes Yes
Clustered by Firm
and Year
n 34,829 34,829 19,001 20,872 20,872 9,872 1,022 1,022 447


TABLE 4
Regressions of Future Changes in Profit Margin and Asset Turnover on an Indicator Variable for Public Firms and Financial Performance Variables
Panel A: Profit Margin (PM) Analysis
DPMtþ1 DPMtþ3 DPMtþ5 DPMtþ1 DPMtþ3 DPMtþ5 DPMtþ1 DPMtþ3 DPMtþ5

Intercept 0.011 1.658 0.011 1.676 0.078 3.046 0.019 4.330 0.009 1.920 0.018 0.598 0.034 0.805 0.023 0.407 0.090 1.165
PUBLIC 0.004 0.234 0.010 1.760 0.021 2.290 0.002 0.810 0.005 1.870 0.012 3.710 0.025 0.635 0.043 2.580 0.054 2.381
RNOA 0.008 4.209 0.003 1.555 0.025 6.845 0.002 1.470 0.001 0.570 0.017 5.580 0.046 3.299 0.031 2.229 0.020 0.775
NOA 0.000 9.008 0.000 14.615 0.000 12.222 0.001 3.850 0.001 6.660 0.000 1.180 0.000 2.445 0.000 3.919 0.000 3.458
SALES_GR 0.004 1.459 0.016 4.970 0.023 5.580 0.020 7.300 0.042 14.130 0.065 14.120 0.034 1.098 0.021 0.924 0.041 1.134

LOSS 0.011 8.072 0.012 8.417 0.011 4.879 0.050 24.420 0.050 22.820 0.057 14.670 0.042 3.878 0.033 3.017 0.008 0.396
ATO 0.000 1.057 0.000 4.794 0.001 6.818 0.001 7.900 0.001 11.100 0.001 8.650 0.000 1.525 0.000 0.355 0.001 1.398
PM 0.184 25.789 0.304 40.702 0.362 40.139 0.151 28.180 0.248 43.840 0.267 33.390 0.336 6.921 0.379 6.635 0.491 9.271
Adjusted R2 16.36% 29.09% 40.78% 16.43% 26.46% 35.87% 24.29% 32.54% 53.52%
Industry Fixed Yes Yes Yes Yes Yes Yes Yes Yes Yes
Effects
Clustered by Firm
and Year
n 34,829 34,829 19,001 20,872 20,872 9,872 1,022 1,022 447
43
TABLE 4 (continued)
44
Panel B: Asset Turnover (ATO) Analysis

DATOtþ1 DATOtþ3 DATOtþ5 DATOtþ1 DATOtþ3 DATOtþ5 DATOtþ1 DATOtþ3 DATOtþ5
Intercept 1.627 7.269 2.303 8.832 2.273 2.874 1.673 11.520 3.240 19.040 1.820 2.680 1.970 3.295 4.034 2.474 6.500 2.025
PUBLIC 1.315 5.929 1.794 6.964 1.388 1.816 1.417 5.720 1.603 9.830 1.729 6.250 1.542 2.901 3.082 1.917 4.081 2.078
RNOA 0.330 5.087 0.398 5.704 0.135 1.275 1.141 6.230 0.973 10.460 2.034 7.050 0.512 1.202 0.663 1.508 0.045 0.043
NOA 0.000 6.361 0.000 8.552 0.000 5.824 0.007 1.310 0.021 3.200 0.011 0.585 0.000 1.147 0.001 2.857 0.002 3.484
SALES_GR 0.148 3.089 0.260 4.667 0.267 4.328 0.749 8.020 0.692 6.330 0.738 4.470 0.400 0.666 1.347 2.085 3.371 2.446
LOSS 0.080 2.600 0.245 6.710 0.172 3.736 0.038 0.550 0.285 3.520 0.034 0.240 0.453 1.686 0.293 1.073 0.831 1.558
ATO 0.143 26.719 0.160 30.169 0.198 19.668 0.166 37.310 0.193 36.810 0.222 16.740 0.210 9.901 0.171 8.151 0.298 8.092
PM 0.187 2.350 0.428 4.505 0.795 6.937 3.294 18.370 4.241 20.180 9.131 31.840 0.529 0.846 0.428 0.681 1.776 1.400
Adjusted R2 14.97% 14.98% 15.44% 20.39% 18.99% 23.64% 27.83% 18.19% 29.34%
Effects
Clustered by Firm
and Year
n 34,829 34,829 19,001 20,872 20,872 9,872 1,022 1,022 447


increased regulatory and disclosure requirements for public firms in the U.S. leading to lower future changes in profit margins
relative to private firms.
Panel B reports the results of the regression on Equation (1) with future changes in asset turnover as the profitability metric
of interest. The results presented in Panel B suggest that public firms have significantly lower future changes in asset turnover
relative to private firms when we examine the full, EB, and PSM samples. This is consistent with public firms overinvesting in
projects due to relatively easy access to capital. The evidence in Panels A and B of Table 4 suggests a rejection of the null
hypothesis for H2 in favor of the alternative that private firms’ differential future changes in profitability manifest through both
future changes in profit margins and future changes in asset turnovers.
Role of Short-Termism, Competition, and Agency Costs

We next examine the potential factors driving the differential future changes in operating profitability of public versus
private firms. Tables 5, 6, and 7 report the results of Equation (2) with the factors included as indicator variables in the
regression. In each table, we include the interaction between the factor and PUBLIC in the regressions. The coefficient on
PUBLIC captures the differential future changes in profitability of public firms versus private firms. X captures the factor, STF,
HIGHCOMP, or AGENCY, for private firms in the sample. The coefficient on PUBLIC X captures the effect of the factor on
the differential future changes in profitability of public firms relative to private firms.
Table 5 reports the results for industry short-termism on the unmatched sample as well as the EB and PSM samples of
firms. The coefficient on PUBLIC is negative and at least marginally significant for DRNOAtþ3 and DRNOAtþ5 for the three
samples, with the exception of DRNOAtþ3 for the full sample. This is consistent with the findings in Table 3 that public firms
experience lower future changes in profitability than private firms. In addition, the coefficient on PUBLIC STF is negative and
at least marginally significant for all the long-term horizons examined within the full, EB, and PSM samples. This suggests that
the lower future changes in profitability for public firms are associated with the short-term orientation of the industry.
Table 6 reports the results for industry competition, and the results largely mirror those reported on short-term focus.
Again, the coefficient on PUBLIC is negative and at least marginally significant for all the long-term horizons examined within
the full, EB, and PSM samples except for DRNOAtþ3 for the full sample. Furthermore, the coefficient on PUBLIC
HIGHCOMP is negative and at least marginally significant for all long-term horizons examined within the three samples of
public and private firms. This suggests that the lower future changes in profitability for public firms are associated with the
competitiveness of the industry.
Table 7 reports the results for agency issues, where Panel A reports the results with low firm productivity as the proxy for
high agency costs, and Panel B reports the results with low firm growth as the proxy for high agency costs. The results are
consistent with the lower future changes in profitability being associated with agency costs. In both panels, the coefficient on
PUBLIC is negative and at least marginally significant for all the long-term horizons examined within the full, EB, and PSM
samples. Additionally, the coefficients on PUBLIC AGENCY1 and PUBLIC AGENCY2 are negative and at least marginally
significant for all long-term horizons examined within the three samples of public and private firms, except for DRNOAtþ5 for
the PSM sample when agency costs associated with low firm growth (i.e., AGENCY2) is examined. This suggests that the lower
future changes in profitability for public firms are associated with the agency costs faced by the firm.
Overall, these findings are consistent with public firms experiencing lower future changes in profitability than private firms,
in terms of both future changes in profit margins and future changes in asset turnovers. The findings are also consistent with the
lower future changes in profitability for public firms being driven by short-termism, competition, and agency problems.
Role of Transient Institutional Ownership within Public Firms

We next examine whether the lower future changes in profitability for public firms relative to private firms are more
pronounced for public firms with higher transient ownership. Bushee (2001) finds that the level of ownership by transient
institutions is positively (negatively) associated with the amount of firm value in expected near-term (long-term) earnings.
Moreover, the short investment horizon of transient institutions incentivizes and allows managers the opportunity to make
myopic investment decisions (Porter 1992). Supporting this claim, Bushee (1998) finds that managers are more likely to cut
R&D expenditures to meet current earnings targets if transient institutions dominate their firms’ ownership base. Asker et al.
(2014) find that public firms with more transient ownership make investment decisions that are less sensitive to the firm’s
investment opportunities. This suggests that corporate managers at firms with significant ownership by transient investors may
focus on near-term earnings and potentially exacerbate any differences in long-term operating profitability observed between
public and private firms.
We examine whether the lower future changes in profitability of public firms relative to private firms are more pronounced
for public firms with a high percentage of transient institutional ownership. Specifically, in Table 8 we augment Equation (2)
and include an indicator variable (HIGH_TRA) for high levels of transient institutional ownership. HIGH_TRA is an indicator

46
TABLE 5
Short-Term Focus and Public versus Private Firm Future Changes in Return on Net Operating Assets
Intercept 0.041 1.196 0.047 1.460 0.022 3.091 0.096 5.820 0.038 2.470 0.019 1.250 0.090 0.694 0.237 1.516 0.303 2.021
PUBLIC 0.069 2.023 0.026 1.310 0.082 2.063 0.006 0.820 0.029 4.300 0.008 1.810 0.156 1.231 0.307 1.997 0.192 2.269
STF 0.010 0.459 0.003 0.274 0.053 1.023 0.007 0.780 0.001 0.140 0.038 2.390 0.012 0.334 0.026 0.616 0.152 1.862
PUBLIC STF 0.009 0.427 0.016 1.683 0.052 1.649 0.021 1.760 0.011 1.940 0.043 2.380 0.070 1.824 0.091 1.952 0.306 3.683
RNOA 0.267 35.164 0.388 53.122 0.482 43.846 0.317 52.400 0.475 84.210 0.609 73.090 0.070 1.824 0.091 1.952 0.306 3.683
NOA 0.000 3.428 0.000 6.682 0.000 7.521 0.001 1.710 0.002 3.630 0.000 0.110 0.144 3.934 0.336 8.085 0.468 4.831
SALES_GR 0.030 4.657 0.052 8.618 0.056 7.828 0.060 5.750 0.117 11.940 0.167 12.950 0.000 1.021 0.000 1.771 0.000 2.078
LOSS 0.044 10.823 0.043 10.977 0.021 4.299 0.145 18.610 0.164 22.640 0.111 10.220 0.050 0.971 0.055 1.071 0.103 1.372
ATO 0.004 5.478 0.002 4.691 0.003 3.721 0.004 11.920 0.004 11.850 0.005 10.350 0.107 4.891 0.111 4.022 0.041 0.613
PM 0.142 12.601 0.160 14.145 0.115 8.773 0.452 22.300 0.542 28.680 0.543 24.040 0.001 1.150 0.001 0.409 0.003 0.797
Adjusted R2 15.99% 29.20% 37.62% 19.75% 39.63% 53.66% 13.52% 26.26% 37.64%
Effects
Clustered by Firm
and Year
n 34,829 34,829 19,001 20,872 20,872 9,872 1,022 1,022 447


TABLE 6
Industry Competition and Public versus Private Firm Future Changes in Return on Net Operating Assets
Intercept 0.050 1.210 0.046 1.257 0.080 3.070 0.096 5.85 0.039 2.53 0.085 5.68 0.104 0.80209 0.234 1.496945 0.322 2.092
PUBLIC 0.072 1.774 0.018 1.491 0.079 2.157 0.015 1.640 0.028 3.350 0.012 2.080 0.133 1.047 0.330 2.140 0.260 2.253

HIGHCOMP 0.007 0.653 0.012 1.582 0.034 1.234 0.002 0.220 0.004 0.530 0.033 2.140 0.040 1.224 0.042 1.180 0.173 1.707
PUBLIC HIGHCOMP 0.017 1.818 0.023 2.208 0.043 2.450 0.026 2.200 0.006 1.760 0.029 1.795 0.032 0.921 0.127 2.770 0.229 3.025
RNOA 0.266 34.951 0.388 52.994 0.482 43.874 0.316 52.090 0.475 83.970 0.611 73.650 0.032 0.921 0.127 3.270 0.229 2.255
NOA 0.000 3.738 0.000 6.820 0.000 7.557 0.001 1.690 0.002 3.690 0.001 0.540 0.140 3.853 0.333 8.025 0.442 4.721
SALES_GR 0.028 4.476 0.051 8.400 0.054 7.650 0.057 5.380 0.115 11.770 0.164 12.820 0.000 0.049 0.000 1.024 0.000 0.083
LOSS 0.044 10.983 0.043 10.884 0.022 4.473 0.146 18.690 0.163 22.470 0.109 10.090 0.056 1.077 0.068 1.313 0.038 0.502
ATO 0.004 5.510 0.002 4.624 0.003 3.808 0.004 11.460 0.004 12.230 0.005 11.000 0.103 4.691 0.113 4.171 0.052 0.888

PM 0.142 12.526 0.160 14.092 0.117 8.887 0.450 22.230 0.542 28.730 0.542 24.360 0.002 1.257 0.000 0.280 0.002 0.655
Adjusted R2 16.00% 29.27% 37.85% 19.74% 39.77% 53.99% 13.01% 26.71% 33.31%
Effects
Clustered by Firm
and Year
n 34,829 34,829 19,001 20,872 20,872 9,872 1,022 1,022 447
47
48
TABLE 7
Agency Costs and Public versus Private Firm Future Changes in Return on Net Operating Assets
Panel A: Agency Costs and Extremely Low Productivity
Intercept 0.042 1.209 0.049 1.527 0.035 3.259 0.164 1.860 0.125 1.450 0.194 0.690 0.109 0.868 0.267 1.760 0.280 2.034
PUBLIC 0.064 1.888 0.040 1.929 0.085 2.124 0.109 1.240 0.112 2.120 0.095 1.750 0.129 1.052 0.279 1.875 0.263 2.037
AGENCY1 0.002 0.151 0.011 0.849 0.078 1.575 0.013 0.580 0.023 1.452 0.091 1.749 0.065 2.702 0.117 4.401 0.142 2.108
PUBLIC AGENCY1 0.021 1.781 0.040 1.734 0.039 1.684 0.002 0.080 0.038 1.620 0.047 1.674 0.021 0.735 0.051 1.847 0.069 1.837
RNOA 0.272 34.884 0.395 52.562 0.494 43.296 0.289 50.470 0.414 74.130 0.527 59.350 0.021 0.735 0.051 1.547 0.029 0.437
NOA 0.000 5.912 0.000 9.842 0.000 10.126 0.000 1.770 0.000 3.450 0.000 3.450 0.147 3.977 0.343 8.286 0.472 4.746
SALES_GR 0.027 4.252 0.049 8.008 0.052 7.296 0.033 4.030 0.055 6.820 0.056 5.490 0.000 1.044 0.000 2.130 0.000 1.826
LOSS 0.046 11.370 0.047 11.728 0.027 5.375 0.075 13.280 0.074 13.450 0.041 5.500 0.047 0.920 0.048 0.956 0.065 0.861
ATO 0.003 4.944 0.002 3.878 0.002 2.506 0.003 9.920 0.002 6.530 0.002 3.820 0.112 5.009 0.121 4.391 0.090 1.355
PM 0.159 13.246 0.181 14.974 0.146 10.114 0.241 15.130 0.271 17.450 0.221 11.800 0.001 0.615 0.001 0.410 0.000 0.004
Adjusted R2 16.09% 29.36% 37.94% 16.68% 30.30% 39.09% 13.48% 27.01% 33.69%
Effects
Clustered by Firm
and Year
n 34,829 34,829 19,001 20,872 20,872 9,872 1,022 1,022 447


TABLE 7 (continued)
Panel B: Agency Costs and Extremely Low Firm Growth

Intercept 0.035 1.020 0.047 1.465 0.322 3.139 0.165 1.880 0.120 1.400 0.079 0.280 0.068 0.537 0.235 1.511 0.510 1.764
PUBLIC 0.053 1.566 0.034 1.634 0.107 2.045 0.121 1.390 0.120 2.200 0.022 1.854 0.101 1.593 0.234 1.541 0.238 1.880

AGENCY2 0.036 3.233 0.013 1.311 0.029 1.178 0.026 2.890 0.003 0.380 0.018 1.070 0.044 1.457 0.010 0.283 0.115 1.841
PUBLIC AGENCY2 0.066 5.786 0.047 4.534 0.049 1.979 0.062 6.120 0.042 4.170 0.034 1.970 0.072 2.203 0.111 3.082 0.122 1.435
RNOA 0.265 35.072 0.387 53.078 0.481 43.921 0.286 49.910 0.412 73.590 0.522 58.710 0.135 3.705 0.326 7.888 0.407 4.136
NOA 0.000 3.139 0.000 6.304 0.000 7.294 0.000 1.130 0.000 2.460 0.000 2.270 0.000 0.333 0.000 1.208 0.000 0.038
SALES_GR 0.043 5.815 0.074 10.352 0.070 8.468 0.050 4.810 0.080 7.940 0.070 5.420 0.070 1.014 0.042 0.581 0.009 0.100

LOSS 0.046 11.277 0.047 11.720 0.024 4.715 0.076 13.320 0.075 13.600 0.038 5.040 0.103 4.687 0.113 4.093 0.055 0.799
ATO 0.004 5.614 0.002 4.782 0.003 3.767 0.003 10.540 0.002 7.260 0.003 5.210 0.002 1.277 0.000 0.342 0.003 0.738
PM 0.136 12.222 0.154 13.767 0.113 8.628 0.230 14.430 0.263 16.890 0.210 11.170 0.029 0.487 0.120 1.646 0.131 1.025
Adjusted R2 16.20% 29.33% 37.69% 16.82% 30.34% 38.89% 13.21% 26.75% 31.53%
Effects
Clustered by Firm
and Year
n 34,829 34,829 19,001 20,872 20,872 9,872 1,022 1,022 447
49
50
TABLE 8
Transient Institutional Ownership and Public versus Private Firm Future Changes in Return on Net Operating Assets
Intercept 0.000 1.167 0.047 1.448 0.053 2.698 0.045 2.920 0.019 1.280 0.014 0.880 0.098 0.759 0.146 1.573 0.164 1.678
PUBLIC 0.069 2.018 0.026 1.810 0.052 1.696 0.031 5.080 0.054 9.340 0.045 4.950 0.084 1.058 0.133 1.841 0.110 2.052
PUBLIC HIGH_TRA 0.008 1.598 0.017 2.080 0.034 1.931 0.012 1.320 0.014 1.870 0.013 1.714 0.032 0.606 0.084 2.304 0.075 3.240
RNOA 0.267 35.156 0.388 53.102 0.348 21.503 0.224 46.920 0.348 75.870 0.451 61.500 0.139 3.832 0.332 7.995 0.419 4.294
NOA 0.000 3.516 0.000 6.679 0.000 8.174 0.001 0.880 0.002 3.400 0.000 0.040 0.000 0.061 0.000 0.740 0.000 0.241
SALES_GR 0.030 4.679 0.053 8.644 0.085 7.919 0.061 5.940 0.109 10.950 0.154 11.620 0.052 1.022 0.058 1.141 0.040 0.536
LOSS 0.044 10.834 0.043 11.003 0.006 0.812 0.088 11.890 0.098 13.750 0.060 5.530 0.103 4.708 0.106 3.912 0.054 0.824
ATO 0.004 5.490 0.002 4.711 0.001 0.732 0.069 4.090 0.053 3.220 0.092 6.000 0.002 1.293 0.001 0.555 0.003 0.698
PM 0.142 12.604 0.160 14.140 0.121 6.708 0.072 4.450 0.024 1.550 0.083 5.720 0.045 0.782 0.142 1.955 0.144 1.169
Adjusted R2 15.99% 29.21% 16.71% 15.83% 31.63% 41.87% 12.78% 25.65% 31.03%
Effects
Clustered by Firm
and Year
n 34,829 34,829 19,001 20,872 20,872 9,872 1,022 1,022 477


variable when transient institutional ownership by the public firm is in the 90th percentile (empirically above 13.5 percent
transient institutional ownership).22 We find that high levels of transient institutional ownership compound the future changes
in operating profitability differences observed between public and private firms. Specifically, coefficients on PUBLIC and
PUBLIC HIGH_TRA are negative and at least marginally significant for all the long-term horizons examined within the full,
EB, and PSM samples. Therefore, consistent with Bushee (2001), corporate managers at firms with significant transient
institutional ownership appear to focus on near-term earnings, exacerbating differences in long-term changes in operating
profitability between public and private firms.23
Effect of Audits on Public versus Private Firms’ Future Changes in Profitability

Since public firms naturally have audited financial statements in accordance with GAAP due to regulatory requirements, in
an untabulated analysis we also require our private sample to have audited financial statements. This makes the analysis more
comparable from an information quality perspective.24 We find similar results to those reported in Table 3. The estimated
coefficient on PUBLIC is negative and significant for DRNOAtþ3 and DRNOAtþ5. Therefore, the results suggest that public firms
have significantly lower changes in operating profitability three and five years ahead than private firms that have audited
financial statements. Thus, the differences in future changes in operating profitability between public and private firms are not
driven by the quality of the firm’s earnings.
Limitations
There are several limitations to our study. First, due to sample size and time-series data constraints, our ability to test future
changes in profitability is potentially limited. However, existing studies (e.g., Sloan 1996; Fairfield, Whisenant, and Yohn
2003) use windows as short as one year ahead when examining future changes in profitability and therefore our horizon is not
inconsistent with, and some cases longer than, that used in prior research.
Additionally, our results are generalizable only to the extent that the private firms in our sample and their corresponding
public matches are representative of private and public firms in general. The Sageworks database is populated by firms that are
in contact with auditors and bankers that take the extra time to benchmark their clients’ ratios and financial data against what
they must believe to be a useful and archetypical sample of firms. Therefore, this process potentially leads to particular types of
private firms being included in the Sageworks sample. For example, the firms included in the database might include firms with
relatively higher profitability if auditors and bankers choose to include more profitable firms for benchmarking.
Finally, the variables available to us to examine ownership structure, instead of public versus private ownership in general,
are restricted and limit our ability to identify the specific mechanisms and corporate governance characteristics that result in the
observed differences. Despite these limitations, our results provide insights for managers (of both public and private firms) on
the overall effect of public versus private ownership on future changes in profitability.
VI. CONCLUSION
In this study, we exploit a large cross-sectional sample of public and private firms, as well as entropy balanced and
propensity score matched samples of public and private firms based on various observable characteristics, to examine whether
public and private firms experience differential future changes in operating profitability. We find robust evidence that public
firms experience lower future changes in profitability than private firms. We also find that the relatively lower long-term
profitability for public versus private firms is attributable to both lower changes in profit margins and changes in asset
turnovers. Finally, we find evidence consistent with the lower future changes in operating profitability of public firms relative to
private firms being driven by short-termism, competition, and agency problems, and being more pronounced for public firms
with high levels of transient institutional ownership. The results of our study provide evidence and insights that could aid
managers of both private and public firms in understanding the implications of public ownership.
The study contributes to the literature on the effect of ownership structure on firm performance. It also contributes to the
literature examining differential investment between public and private firms by examining the effect on future changes in
22
Results are qualitatively similar (i.e., at the 10 percent level) if we use the median of transient institutional ownership.
23
We do not include the main effect of X because all firms with transient institutional ownership in our sample are public firms. Thus, HIGH_TRA is equal
to PUBLIC HIGH_TRA, and we only need to include the interaction in our model. In this model the coefficient on PUBLIC captures the differential
future changes in profitability of public firms versus private firms for public firms with lower levels of transient institutional ownership, while the
coefficient on PUBLIC HIGH_TRA captures the differential future changes in profitability differences between public and private firms for public
firms with high levels of transient institutional ownership.
24
Based on our conversations with Sageworks, the firms in our sample are audited according to U.S. GAAP; however, this is not a specific data field that
is available to us.

profitability and on the components of profitability (i.e., asset turnover and profit margin). We also contribute to the emerging
literature on differences between public and private firms by documenting differential future changes in operating profitability
between public and private firms. We document how mechanisms such as short-termism, competition, and agency costs
influence the differential future changes in profitability. Finally, we contribute to the debate on economic short-termism by
documenting that the relatively lower future changes in profitability of public firms versus private firms are associated with the
short-term orientation of the industry and are more pronounced for public firms with greater transient ownership.
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APPENDIX A
Variable Definitions
Variable Definition
AGENCY1 Equal to 1 if asset turnover (ATO) is in the bottom 25th percentile, and 0 otherwise.
AGENCY2 Equal to 1 if sales growth (SALES_GR) is in the bottom 25th percentile and 0 otherwise.
ASSETS Equals total assets (AT, TOTALASSETS).
ATO Asset turnover equals sales divided by average net operating assets.
HIGHCOMP An indicator variable based on the Herfindahl index, measured as the square of firm sales (private firms from Sageworks
and public firms from Compustat) scaled by aggregate industry sales summed over all firms (private firms from
Sageworks and public firms from Compustat) in the industry for the year. Lower values of the Herfindahl index
indicate more competitive industries. Therefore, HIGHCOMP is defined as 1 when a firm’s industry Herfindahl index
is less than the median Herfindahl index across all industries for the year, and 0 otherwise.
HIGH_TRA An indicator variable when transient institutional ownership by the public firm is in the 90th percentile (empirically
above 13.5 percent transient institutional ownership).
LOGAT Natural logarithm of ASSETS.
LOSS Equal to 1 if net income is less than 0, and 0 otherwise.
LTDEBT Total long-term debt (DLTT, SENIORDEBT plus SUBORDINATEDDEBT) divided by average total assets.
NI NI equals net income (NI, NETINCOME).
PM Profit margin equals operating income divided by sales.
PUBLIC An indicator variable that is equal to 1 when the firm is a public firm, and 0 otherwise.
RNOA Return on net operating income equals operating income divided by average net operating assets. Operating income
equals sales (Compustat SALE, Sageworks SALES) minus cost of goods sold (COGS, COSTOFSALES plus
OVERHEAD) minus selling, general & administrative (XSGA, ADVERTISING, RENT, and PAYROLL), minus
depreciation and amortization (DP, DEPRECIATION plus AMORTIZATION). Net operating assets equals
stockholders’ equity (SEQ, TOTALEQUITY) minus cash and short-term investments (CHE, CASH) plus interest
(XINT, INTEREST) plus debt in current liabilities (DLC, SHORTTERMDEBT plus CURRENTLONGTERMDEBT) plus
long-term debt (DLTT, SENIORDEBT plus SUBORDINATEDDEBT).
SALES Equals total sales (SALE, SALES).
SALES_GR Equals sales in the year tþx less sales in tþx1 divided by sales in tþx1.
STF An indicator variable that captures firms in short-term oriented industries. The STF classification is based on the
designation of an industry being short-term focused by Brochet et al. (2015) and captures public firms in the
electronic equipment, computer, business services, supplies, banking, energy, trading, insurance, and wholesale
industries.
APPENDIX B
Propensity Score Matching Logistic Regression
PUBLICit ¼ d0 þ d1 RNOAit þ d2 SALES GRit þ d3 PMit þ d4 ATOit þ d5 LOSSit þ d6 LOGATit þ Rt bt YEARt
þ Rkck INDUSi þ ei;t
Intercept RNOA SALES_GR PM ATO LOSS LOGAT

Coefficient 22.960 2.310 0.895 0.564 0.000 0.533 1.740
Odds Ratio NA 0.099 0.409 1.758 1.000 1.705 5.735
z-statistic 0.104 16.559 4.332 2.265 0.198 5.956 54.890
Year Fixed Effects Yes
Industry Fixed Effects Yes
McKelvey-Zavonia R2 64.1%
McFadden’s R2 52.4%
n 20,872

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JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH American Accounting Association

Vol. 32, No. 2 DOI: 10.2308/jmar-52550

Private versus Public Corporate Ownership: Implications

Teri Lombardi Yohn

JEL Classifications: M41; M42; M44.

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II. BACKGROUND AND HYPOTHESES

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III. RESEARCH DESIGN

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IV. SAMPLE SELECTION

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Panel A: Private Firm Sample Selection Process

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Profitability between Public and Private Firms

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Volume 32, Number 2, 2020

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Panel A: Entropy Balanced

Panel B: Propensity Score Matched

All variables are defined in Appendix A.

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Panel B: Asset Turnover (ATO) Analysis

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Role of Short-Termism, Competition, and Agency Costs

Role of Transient Institutional Ownership within Public Firms

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DRNOAtþ1 DRNOAtþ3 DRNOAtþ5 DRNOAtþ1 DRNOAtþ3 DRNOAtþ5 DRNOAtþ1 DRNOAtþ3 DRNOAtþ5

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Panel B: Agency Costs and Extremely Low Firm Growth

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Effect of Audits on Public versus Private Firms’ Future Changes in Profitability

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Intercept RNOA SALES_GR PM ATO LOSS LOGAT

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