Privately Held Companies Are 50% More Profitable Than Publicly Traded Firms: Fed Study

The Federal Reserve Bank of San Francisco has released a study indicating that private companies have seen a significant rise in profit rates over the past four decades, surpassing their publicly traded counterparts.

What Happened: The study reveals that private firms began to outperform public corporations in terms of profit rates in the late 1970s. Currently, they are over 50% more profitable. The researchers attribute this to factors such as reduced competition, higher risk tolerance, and fewer federal regulations, Bloomberg reported on Tuesday.

The study also suggests that private companies have the leeway to pursue riskier investments or strategies, which could potentially yield higher returns in the long run compared to their public counterparts.

The researchers relied on data from the Compustat database and the Integrated Macroeconomic Accounts to examine publicly traded U.S. companies. They calculated the profit rate for private companies by subtracting public corporation totals from the overall totals of the U.S. economy.

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The study’s findings underscore the growing profitability of private firms and the potential risks of using the stock market as a representation of the overall economy. The researchers caution against using interest rates in financial markets to gauge the financing costs of privately-held companies.

Why It Matters: This comes in the wake of the Federal Reserve’s decision to maintain high interest rates throughout 2024, a move that has sparked a debate over its potential impact on the U.S. economy. This decision, driven by persistent inflation, has raised questions about its potential impact on the economy.

Furthermore, Federal Reserve chair Jerome Powell is scheduled to testify before the Senate Banking Committee on July 9, where he is expected to discuss a range of topics, including interest-rate policy and the state of the banking system. This comes at a time when calls for interest rate cuts are growing.

Read Next: Inflation Cools In May, Fed Hints At Slower Pace Of Rate Cuts, Stocks Hit New Record Highs: This Week In The Market

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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari