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Contrast corporate issuers that are publicly owned with those held privately

CFA® Level I · Corporate Issuers · Organizational Forms, Corporate Issuer Features, and Ownership · CI.8.b

The idea

Publicly owned companies have shares listed on an exchange, which gives investors liquidity, observable prices and wide ownership, and gives the company access to deep pools of capital. In return they face extensive, ongoing disclosure, regulatory costs and pressure from short-term market expectations. Privately owned companies have no public market for their shares, lighter disclosure and usually concentrated ownership, which can allow a longer-term focus but makes the shares illiquid and capital harder to raise. A private company can go public through an initial public offering, a direct listing or a merger with a special purpose acquisition company. A public company can be taken private, often through a leveraged buyout that removes its listing and adds substantial debt to its balance sheet.

A practice question

From the question bank, with the reason each wrong option is wrong.

Compared with a privately owned company, a publicly listed company typically has shares that are:

  1. more liquid and easily traded — correct
  2. subject to fewer disclosure rulesWhy not: Listed companies face more disclosure requirements from exchanges and regulators, not fewer.
  3. held by a small group of ownersWhy not: Concentrated ownership is typical of private companies; listed shares are usually widely held.

Public shares trade on an exchange, so investors can buy and sell readily at observable prices. The price of that liquidity is extensive, ongoing disclosure and regulatory oversight.

A harder one

Compared with public company shareholders, investors in a privately owned company most likely face:

  1. more liquidity and more public disclosureWhy not: Private company shares have no exchange listing and face lighter reporting requirements, reversing both features.
  2. more liquidity but less public disclosureWhy not: Lighter disclosure is right, but without a public market private shares are harder, not easier, to sell.
  3. less liquidity and less public disclosure — correct

Private shares have no public market and are subject to fewer disclosure requirements, so investors accept illiquidity and less information, often in exchange for more influence over the company.

The hardest tier

A private equity firm acquires all the shares of a listed company using a large amount of borrowed money. The most likely outcomes are:

  1. the company delists and its leverage rises — correct
  2. the company stays listed and its leverage fallsWhy not: Buying out all the shares removes the public float, and the borrowed money raises the company's debt.
  3. the company delists and its leverage fallsWhy not: Delisting is right, but a buyout financed mainly with debt leaves the company more, not less, leveraged.

This is a leveraged buyout, a take-private transaction. The acquired company is removed from the exchange and the acquisition debt is typically placed on its balance sheet, increasing leverage substantially.

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