Externalities of Public Firm Presence: Evidence from Private Firms’ Investment Decisions

60 Pages Posted: 9 Apr 2012 Last revised: 21 Jan 2014

Brad A. Badertscher

University of Notre Dame

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Hal D. White

Penn State University

Date Written: February 25, 2013

Abstract

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.

Keywords: Corporate Investment, Private Companies, Uncertainty, Disclosure, Investment Efficiency

JEL Classification: D22, D80, D92, G31, G32, G38, M41

Suggested Citation

Badertscher, Brad A. and Shroff, Nemit and White, Hal D., Externalities of Public Firm Presence: Evidence from Private Firms’ Investment Decisions (February 25, 2013). Journal of Financial Economics (JFE), Vol. 109, No. 3, pp. 682-706, September 2013; MIT Sloan Research Paper No. 4988-13. Available at SSRN: https://ssrn.com/abstract=2037287 or http://dx.doi.org/10.2139/ssrn.2037287

Brad A. Badertscher

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Nemit Shroff (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main St.
E62-679
Cambridge, MA MA 02142
United States
6173240805 (Phone)

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=51407&co_list=F

Hal D. White

Penn State University ( email )

210 Business Building
Smeal College of Business
University Park, PA 16802-3306
United States
814-863-7055 (Phone)

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