اثرات جانبی از حضور شرکت های عمومی: شواهدی از تصمیمات سرمایه گذاری شرکت های خصوصی "

Public firms provide a large amount of information through their disclosures. In addition, information intermediaries publicly analyze, discuss, and disseminate these disclosures. Thus, greater public firm presence in an industry should reduce uncertainty in that industry. Following the theoretical prediction of investment under uncertainty, we hypothesize and find that private firms are more responsive to their investment opportunities when they operate in industries with greater public firm presence. Further, we find that the effect of public firm presence is greater in industries with better information quality and in industries characterized by a greater degree of investment irreversibility. Our results suggest that public firms generate positive externalities by reducing industry uncertainty and facilitating more efficient private firm investment.

Public firms disclose large amounts of information, such as their business strategy, financial performance, expected future outlook, current and future investment outlays, material contracts, and business risks. In addition, information intermediaries, such as financial analysts and the business press, analyze, discuss, and disseminate firms' disclosures. Collectively, these disclosure activities can improve the information environment for firms within the industry by reducing uncertainty about demand, supply, and cost conditions, as these factors are interrelated within an industry (Mitchell and Mulherin, 1996 and Admati and Pfleiderer, 2000). In contrast, private firms are not required to publicly disclose information in the U.S. Also, analysts and the business press provide much less coverage of private firms. As a result, little is known about the operations and performance of private firms. Thus, the composition of public and private firms in an industry is likely to have a significant effect on the industry's information environment. This paper examines 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 et al., 2007 and Julio and Yook, 2012).1 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.2 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 (Desai et al., 2009 and Asker et al., 2012) and investment opportunities is measured using lagged sales growth (Wurgler, 2000, Whited, 2006, Bloom et al., 2007, Biddle et al., 2009 and Asker et al., 2012). We proxy for public firm presence in an industry using the percentage of industry sales that are generated by public firms. Consistent with our prediction, we find that private firm investment is more sensitive to investment opportunities in industries with a greater public firm presence. This result is robust to using alternative proxies for investment opportunities (i.e., Tobin's Q for private firms, industry Q, and state tax rate changes), an alternative measure of public firm presence, and controls for the degree of competition in an industry. Further, our findings continue to hold when we use firm fixed-effects and a ‘changes’ specification to test our hypothesis. Next we examine cross-sectional variation in the relation between public firm presence and private firm investment sensitivities. We begin by examining whether differences in the quality and quantity of information disclosed in the industry affect the extent to which public firm presence reduces uncertainty. If the firms and information intermediaries in an industry disclose less information or information that conceals economic performance, public firm presence is less likely to reduce uncertainty and facilitate the investment decisions of peer firms in such an industry. Accordingly, we predict and find that the relation between public firm presence and private firms' investment sensitivity is stronger when the public firms have more informative earnings, provide more management forecasts, and are covered by more analysts. Second, we examine whether variation in the degree of investment irreversibility across industries affects the relation between public firm presence and private firms' investment sensitivity. Corporate investment decisions are characterized by some degree of irreversibility, i.e., investment expenditures are at least partially sunk, and thus cannot be costlessly undone once incurred (Pindyck, 1991). When investment decisions are irreversible, uncertainty makes firms more cautious and leads firms to take a ‘wait and see’ strategy, thereby reducing the sensitivity of investment to investment opportunities (Bloom et al., 2007 and Julio and Yook, 2012). Accordingly, we predict and find that the effect of public firm presence on the responsiveness of investment to investment opportunities is greater in industries characterized by higher degrees of investment irreversibility. These cross-sectional results provide additional support for our hypothesis that public firms' disclosures reduce industry uncertainty, which helps peer firms in the industry identify and exploit investment opportunities. Like other research that examines corporate investment, our empirical tests are subject to potential endogeneity concerns. A standard concern in the investment literature is that investment opportunities are measured with error (e.g., Erickson and Whited, 2000). Further, public firm presence in an industry might be correlated with industry-wide growth opportunities that are not captured by our firm-specific proxies for growth opportunities.3 We conduct three tests to mitigate these concerns. First, we identify two instruments for public firm presence, verify the strength of these instruments (Staiger and Stock, 1997) and their joint validity using an overidentification test (Sargan, 1958), and show that our inferences are robust to using both instruments. Second, we conduct our analyses in a setting where private firms are subject to similar disclosure requirements as public firms—i.e., the United Kingdom (Ball and Shivakumar, 2005). Since private firms publicly disclose financial information in the U.K., greater public firm presence is unlikely to have an effect on industry uncertainty. Accordingly, we predict that public firm presence will not affect investment sensitivities in the U.K. However, if investment sensitivities are instead driven by industry growth opportunities or measurement error, we should continue to find that public firm presence impacts private firms' investment sensitivities in the U.K. Consistent with our prediction, we find no evidence that public firm presence affects investment sensitivities of private firms in the U.K., which further validates our inferences. Third, following Asker, Farre-Mensa, and Ljungqvist (2012), we use changes in state corporate income tax rates as an exogenous shock to investment opportunities, thereby eliminating the need to measure investment opportunities. Again, we find that our inferences are unchanged. This paper makes several contributions. First, investment project selection is one of the most fundamental and important tasks undertaken by a firm (Hubbard, 1998). Our evidence provides insights into the process through which managers obtain industry-relevant information, which is central to effective investment decision making. Specifically, we find that the presence of public firms in an industry fosters disclosures by not only the public firms themselves, but also information intermediaries that analyze, summarize, and disseminate firm news. Collectively, these disclosures help to provide a more comprehensive view of the industry, thereby reducing uncertainty and facilitating more efficient investment. Second, our paper adds to the emerging literature on information transfers and its effect on peer firm investment (Durnev and Mangen, 2009, Beatty et al., 2013 and Shroff et al., 2013). For example, Shroff, Verdi, and Yu (2013) show that the external information environment facilitates the investment decisions of multinational firms by allowing parent firms to better monitor their foreign subsidiaries. Durnev and Mangen (2009) show that accounting restatements are associated with lower abnormal returns and reduced investment by non-restating firms in the industry. The authors suggest a ‘learning’ effect in that restatements convey information about investment projects to the managers of restating firms' competitors. However, Gleason, Jenkins, and Johnson (2008) argue that restatements cause investors to reassess the content and credibility of financial statements issued by other firms in the same industry—i.e., a transparency or accounting quality effect. Therefore, changes in firms investment decisions following restatements by competitors could be due to changes in the industry cost of capital. We add to this literature by using a broader setting unrelated to restatements to document positive externalities from public firm presence. Our setting and the mechanisms we study allow us to further understand the information spillovers from public firms. Third, although private firms comprise the vast majority of firms in the U.S., little is known about private firms' investment. Asker, Farre-Mensa, and Ljungqvist (2012) compare the investment behavior of public and private firms and show that private firm investment is more efficient than that of a matched sample of public firms. They attribute the difference in investment efficiency to agency issues in public firms. Rather than compare public and private firm investment, this paper examines whether differences in investment efficiency within the set of U.S. private firms can be partially explained by variation in the presence of public firms in the industry. Finally, despite its pervasiveness, disclosure regulation is often quite challenging to justify because of market-based incentives to disclose information (Admati and Pfleiderer, 2000, Leuz and Wysocki, 2008 and Berger, 2011). That is, since the costs of obfuscating information are ultimately borne by the firm, the firm has incentives to disclose information to reduce such costs (see, e.g., Admati and Pfleiderer, 2000). One justification put forward in favor of mandatory disclosure is the presence of positive externalities to such disclosure. This paper provides initial evidence consistent with positive externalities of corporate disclosures, namely, improving the average investment efficiency of private firms in the industry. The rest of the paper proceeds as follows. In Section 2, we develop our hypotheses. Section 3 describes our sample and variables. Section 4 presents our empirical design and results. Section 5 addresses endogeneity. Section 6 presents sensitivity tests. Section 7 concludes.

Publicly owned firms disclose both mandatory and voluntary information to the public. Further, information intermediaries, such as analysts and the business press, analyze, summarize, and disseminate firm disclosures. As a result, there is a tremendous amount of public information about these firms that is not available for private firms. Therefore, the composition of public and private firms in an industry may affect the information environment in that industry. In this paper, we examine whether the presence of public firms in an industry facilitates the investment decisions of private firms in that industry by reducing uncertainty in the industry. We find that public firm presence has a significant effect on the responsiveness of private firms' investment to their investment opportunities. Further, we find that this effect is greater in industries with better information quality and those with greater investment irreversibility. These inferences are robust to alternative explanations related to measurement error in our proxy for investment opportunities and a growth opportunity-based interpretation of public firm presence. This paper contributes to the literature by providing insights into the process through which managers obtain industry-relevant information, which facilitates their investment decisions. Our analysis suggests that public firms' disclosures help to provide a more comprehensive view of the industry, thereby facilitating more efficient investment. Further, by showing that public firms' disclosures can have positive externalities, we contribute to the literature on the merits of mandatory disclosure regulation. Disclosure regulation is often quite challenging to justify because of market-based incentives to disclose information (Admati and Pfleiderer, 2000, Leuz and Wysocki, 2008 and Berger, 2011). Since the costs of obfuscating information are ultimately borne by the firm, the firm has incentives to disclose information to reduce such costs until the marginal net benefit of disclosure to the firm is zero. However, the presence of positive externalities to firms' disclosures is one potential justification for disclosure regulation.