In our paper, Externalities of Public Firm Presence: Evidence from Private Firms' Investment Decisions, forthcoming in the Journal of Financial Economics, we examine whether greater public firm presence in an industry can increase the responsiveness of firms' investment to investment opportunities by enriching the industry's information environment, thereby reducing uncertainty. The intuition is that as more firms in an industry publicly disclose information and receive coverage by information intermediaries, a more complete perspective of the current economic environment and future outlook for the industry emerges. This reduction in industry uncertainty can then be used by peer firms in the industry to make more informed investment decisions. Our analysis is based on the theoretical predictions of investment under uncertainty, which indicates that when investment decisions are (even partially) irreversible, firms become cautious and hold back on investment in the face of uncertainty (e.g., Dixit and Pindyck, 1994). As a result, higher uncertainty leads to a reduction in firms' responsiveness to investment opportunities (Bloom, Bond, and Van Reenen, 2007; Julio and Yook, 2012). If greater public firm presence leads to lower uncertainty in the industry, firms operating in that industry are likely to be more responsive to investment opportunities.
Using a novel data set of private U.S. firms created by Sageworks Inc., we investigate whether private firms operating in industries with greater public firm presence are more responsive to their investment opportunities than those operating in industries with lower public firm presence. Following Hubbard (1998), we interpret the responsiveness of investment to investment opportunities as a proxy for investment efficiency, where investment is measured as the change in gross fixed assets (Asker, Farre-Mensa, and Ljungqvist, 2012) and investment opportunities is measured using lagged sales growth (Wurgler, 2000; Whited, 2006; Bloom, Bond, and Van Reenen, 2007). We proxy for public firm presence in an industry using the percentage of industry sales that are generated by public firms.
