(Bloomberg) -- Publicly traded companies’ profits fell along with interest rates over the last four decades, while profit rates for privately-held firms climbed “substantially,” according to researchers for the Federal Reserve Bank of San Francisco. 

This implies that private companies have made up the difference, either by increasing their market power or their risk, economists Anton Bobrov, Carter Davis, Alexandre Sollaci, and James Traina wrote in a working paper published Monday on the San Francisco Fed’s website.

Private returns began to rise relative to public corporations in the late 1970s and are now more than 50% higher, the authors found. “This shift is substantial, with private company returns surpassing public corporation returns by over 10 percentage points after 2000.”

The research suggests private companies are increasingly more profitable than public ones because they may face less competition, allowing them to raise prices and profits without increasing capital costs. They may also operate with higher risk tolerances absent shareholder pressures and have fewer federal regulations that require monitoring, disclosure and compliance. 

That translates to more flexibility for private companies to make riskier investments or strategies that could see higher returns over the long term than their public counterparts. “Greater risk tolerance would imply an increased cost of capital for private companies,” the research showed.

“All else being equal, the gap between the interest rates that make up financing costs and the profit rates that reflect capital returns should narrow over time,” according to the paper.

That’s because when companies “can finance at low rates to invest in projects with high returns, it drives up the demand for low-cost capital in financial markets and drives down the supply of high-profit investment opportunities,” the researchers said.

The researchers analyzed publicly traded US companies using the Compustat database, and economy-wide data from the Integrated Macroeconomic Accounts, which combines inputs from the Federal Reserve Board Financial Accounts and the Bureau of Economic Analysis’s National Income and Product Accounts. They used EBITDA, or earnings before interest, taxes, depreciation and amortization, to look at profits accruing to equity and debt holders. 

In order to deduce the profit rate for private companies, the researchers subtracted public corporation totals from the US economy’s overall totals, correcting for differences in the data to make returns for private and public companies easier to compare. 

“Interest rates in financial markets only track the financing costs of publicly traded corporations, not privately-held companies,” the authors said, stressing the danger of using the stock market to represent the overall economy.

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