The Relationship Between Public Firm Misvaluation and Private Peer Investments: A Study of Public-Private Peer Capital Markets finds that public firm misvaluation influences the amount of private peer investments, while the alternative shared sentiment hypothesis finds that there is no such relationship. Using a price-to-fundamental ratio as the exogenous instrument and mutual fund flows as the proxies, we find that misvaluation and private firms’ investments are positively related. The shared sentiment hypothesis, in turn, has robust evidence for the growth opportunities in the private sector.
Small-firm investment in the US and abroad is not significantly higher in countries that do not have developed legal and financial systems. The majority of government-financed small-firm investments occur in the United States. In this case, government funding tends to go to larger firms, but alternative sources of finance do not fill the void. Trade credit and non-bank loans are also less prevalent in underdeveloped nations. Despite the potential for these alternative sources of finance to fill the gap, they remain a lagging indicator.
As a result of underdeveloped economic systems, government funding for small-firms has been insufficient. While private-sector loans and private equity are common forms of financing for large firms, small-firm investments are rare. Without government support, small firms face a much tougher time accessing external finance. The lack of available resources is a major challenge for small- and medium-sized enterprises in developing nations, and an increase in freedom does not necessarily alleviate the financing constraints for these smaller companies.
Increasing the availability of public and private funding for small-firm investment has been a key priority for governments. A more developed legal and financial system will allow small firms to benefit from public-sector investments. As a result, more small- and mid-sized companies will have more access to external financing, including venture capital and equity. Further, the increased access to trade credit will help firms grow in underdeveloped countries. While the availability of public funding for these types of investment is a significant factor in the growth of these businesses, it is not a sufficient substitute for private sector funding.
In a country where there is a lack of public financing, a lack of private investment is limited, which limits the availability of external finance. However, small-firm investments are made in underdeveloped countries when there are less developed financial and legal systems. This means that the financing gap is not easily filled. In addition, small firms cannot afford to pay high interest rates. Thus, public funds are inadequate for investment in developing countries. If the government does provide funding for investment, it will be distributed to larger firms.
Governments can improve their finance systems for small firms. A lack of public finance can make it difficult for a small-firm to obtain capital. It is therefore important to provide these types of funding with adequate collateral. The availability of capital is the most important criterion for investment in developing countries. In addition to the availability of private financing, government loans are not the only source of firm financing. In addition to government and private funding, there are other alternative sources of funding.