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 net- work 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 and public firms to invest in R&D have positive effects on public firms. Given these shocks are stronger for private firms located in these states, these results are consistent with private firms developing products that are complementary to public firms. We also find that after these innovation shocks, related public firms increase acquisitions of private firms and have improved profitability, sales growth, and investments, including R&D. Measures of competition and competitive threats also decline following private firm innovation shocks. In contrast, we find that state-level liquidity shocks, which can instead relax financing constraints of private firms located in these states, negatively impact related public firms, consistent with private firms increasing the competitive pressure on pub- lic firms. These results suggest that non-innovation demand or liquidity shocks enable private firms to challenge public firms as competitors, while innovation shocks increase private firm complementarities to public firms thus benefiting both public and private firms.