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No. 384
We contribute to the debate about the future of capital markets and corporate finance, which has ensued against the background of a significant boom in private markets and a corresponding decline in the number of firms and the amount of capital raised in public markets in the US and Europe.
Our research sheds light on the fluctuating significance of public and private markets for corporate finance over time, and challenges the conventional view of a linear progression from one market to the other. We argue instead that a more complex pattern of interaction between public and private markets emerges, after taking a long-term perspective and examining historical developments more closely.
We claim that there is a dynamic divide between these markets, and identify certain factors that determine the degree to which investors, capital, and companies gravitate more towards one market than the other. However, in response to the status quo, other factors will gain momentum and favor the respective other market, leading to a new (unstable) equilibrium. Hence, we observe the oscillating domains of public and private markets over time. While these oscillations imply ‘competition’ between these markets, we unravel the complementarities between them, which also militate against a secular trend towards one market. Finally, we examine the role of regulation in this dynamic divide as well as some policy implications arising from our findings.
386
An unfamiliar term in the not-too-distant past, “net zero” has become a headline-maker in the business and financial world with the growing importance of climate change. Succumbing to increasing pressure, companies and financial institutions around the world have come to adopt net-zero transition plans and targets, pledging to hit certain emission-reduction targets in a long-term period. Moreover, regulators around the world have started to require the disclosure or adoption of net-zero transition plans and targets.
However, an unintended consequence of net-zero transition commitments has been the increased popularity of divestments. That is, many firms seeking to fulfill a net-zero plan are passing on carbon-intensive assets (i.e., oil, gas, and coal assets) to other firms that are likely to be non-committal to environmental goals or that operate under less pressure from investors, stakeholders, and regulators. Such divestments, technically mergers and acquisitions (M&A) transactions, present an ideal opportunity to improve a divesting firm’s environmental record and reach ambitious net-zero goals, creating the impression that an emission reduction has occurred. However, the key is how acquiring firms handle these assets. If they continue operating as before, there will not be an overall improvement for the global climate. Worse, such assets can be operated by new owners in a way that causes more emissions. In any case, such divestments undermine the credibility and value of net-zero ambitions by allowing firms to reach targets by simply divesting assets.
This article explores the reasons and motivations for divestments or, more broadly M&As of carbon-intensive assets and explains why the increased role of net-zero commitments can be undermined by those transactions. We provide some evidence to illustrate the landscape of such transactions and the concerns they give rise to. Lastly, we explore several policy options to address the problem.