A Comparison of Profitability and CEO Turnover Sensitivity in Large Private and Public Firms

Abstract

We construct a large sample of both private and public firms from a broad set of industries to provide a direct comparison of efficiency, profitability, and incentive alignment. We find that operating profit scaled by sales and net profit to sales in private firms are less than half those in public firms. Moreover, we find no evidence that CEO turnover is more sensitive to change in scaled profitability in private firms than in public firms. These results are robust to controls for risk, managerial ownership, industry, whether the CEO is a founder or family member, and firm size. High sensitivity of CEO turnover to performance, one possible way to align managerial and shareholder interests, is not prominently featured in the organization design of private firms, which is consistent with our finding that private firms are less profitable than public firms.