Paper: Production and Externalities: The Role of Public Ownership
Authors: Alvin Chen, Erik P. Gilje, and Michael D. Wittry.
We study some under-explored implications of private-to-public transitions. First, the increased dispersion of ownership worsens the moral hazard problem. The firm mitigates the increased moral hazard problem by increasing the intensity of production, which makes the output more informative about managerial effort. However, doing so generates negative externalities, which are only partially internalized by the firm's owners. Second, the reduction in trading frictions due to public listing tends to shift ownership of the firm towards those who internalize less of the firm's negative externalities, leading to more intense production and additional negative externalities. Using asset-level data in the U.S. coal mining industry, we provide evidence consistent with this mechanism. In particular, we find that workplace safety deteriorates after a transition to publicly-listed status, primarily in mines that experience the largest productivity increases. Moreover, we document other findings that are consistent with the model's predictions. For instance, the increase in production and externalities is mitigated when there are external sources of monitoring, less trading post-IPO, and more pecuniary costs of externalities.