3. Benefits of Going and Being Public

3.3. Operational Gains and Governance

Listed companies can also benefit from many potential operational gains and improved corporate governance.

  

  • Executive compensation:
    • Importantly, being listed increases the flexibility in the design of performance-based compensation packages.
    • As in the case of M&A transactions, listed shares are a more valuable to employees when the can be traded freely (after the vesting period).
    • In contrast, for unlisted firm, it is often not practical to give shares to  employees, as lack of liquidity and lack of control significantly lower the subjective value of these shares to the employees (in addition to undesirable dilution effects).
    • Consequently, listed firms are better positioned to use their own shares to incentivize employees.

 

  • Subjecting the firm to the scrutiny of capital markets:
    • Being listed can also have disciplining effects, as it increases the number of stakeholders who monitor and control the firm, including the media, financial analysts, active investors, regulators, etc.
    • As managers of listed companies operate in the public eye, they will tend to be more prudent and avoid situations that could jeopardize the good standing with their stakeholders.

  • Valuable source of information:
    • Moreover, firms can learn from the information that is contained in stock prices. 
    • For example, there is a direct feedback to corporate actions through the stock price. By observing how the market reacts to specific corporate actions, firms gain information about the market's assessment of the firm's prospects.
    • Moreover, higher stock prices could signal the firm that growth opportunities increase (and vice versa).

  • Reputational advantages with stakeholders
    • Finally, there could also be reputational advantages with the firm's stakeholders.
    • As we have mentioned, listed firms have greater visibility and should therefore experience an increase in their brand recognition --- which should positively affect client relationships.
    • Moreover, being listed signals stability and dependability to customers and suppliers. This could be an advantage especially when entering new markets.