Private Firms: Friends or Foes of Public Firms?

Abstract
We examine the impact of positive private firm innovation shocks and private firm liquidity shocks on existing public firm peers using an extensive dynamic textual network of roughly a half million public and private product market peers from 2000 to 2021. We document that state-level shocks to the incentives of private firms to invest in R&D have positive effects on related public firms consistent with product market complementarities. After these innovation shocks to private peers, related public firms increase acquisitions of private firms and have improved profitability, sales growth, competitive positioning, and investments including R&D. In contrast, state-level liquidity shocks, which instead relax financing constraints of private firms located in these states, negatively impact related public firms, consistent with substitution and private firms increasing competitive pressure on public firms. These results indicate a new empirical framework and novel indications of where private firms are either complements or substitutes to larger public firms. Joint paper with Gordon M. Phillips.