Financing and New Product Decisions of Private and Publicly Traded Firms

We exploit Medicare national coverage reimbursement approvals as a quasi-natural experiment to investigate how the financing decisions of private and publicly traded firms respond to changes in investment opportunities. We find that publicly traded companies increase their external financing, and their subsequent product introductions, by more than private companies in response to national coverage approvals. The primary source of the increased financing is through private equity financing of public firms. We show that the stock characteristics of publicly traded firms, such as liquidity and price informativeness, and product market competition are important factors in explaining their financing advantage