Legal Environment and the Differential Performance of Publicly Traded and Privately Held Firms

This study explores whether a country's legal environment affects the performance of its publicly traded and privately held firms differently. We analyze the effects of corruption, property rights, ease of doing business, and legal origin on the performance of publicly traded and privately held firms in 28 countries. We find that publicly traded firms are significantly more profitable than privately held firms in countries with higher corruption, lower protection of property rights, and less efficient business environments. We also find that privately held and publicly traded firms perform comparably in countries with English or Scandinavian legal origin but that differences exist in countries with German or French legal origin countries, as well as in Russia. Our sensitivity tests indicate that our findings are not driven by the adoption of International Financial Reporting Standards or by size differences between publicly traded and privately held firms.