Does Stock Market Listing Really Constrain Corporate Investment: Why US and EU Results Appear To Be Different?

Abstract

We investigate whether public capital markets facilitate or hinder investment, addressing conflicting findings between US and European studies. While some argue that stock market pressures induce short-termism, others contend that public firms invest more efficiently due to greater access to capital. Using a multi-country European dataset, we show that public firms invest more and are more sensitive to investment opportunities than private firms, and that prior US results suggesting investment myopia in public firms are likely driven by selection bias in private firm datasets. Our analysis shows that the source of the different US versus European results is that the Sageworks database of US private firms likely over-represents more successful firms that raise external capital to fund investment. Unlike the United States, where private firm reporting is voluntary, European financial disclosure requirements present a sample of private firms that is less susceptible to self-selection. We demonstrate that imposing a Sageworks-style selection bias on European private firms reverses the results, replicating the patterns found in the US studies. Our findings underscore the critical role of selection bias in shaping conclusions on capital market effects and call for greater scrutiny in private firm data comparisons.