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. Private equity financing is the primary source of the increased financing for 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.

[We provide a model and empirical tests showing how an active acquisition market affects firm incentives to innovate and conduct R&D. Our model shows that small firms optimally may decide to innovate more when they can sell out to larger firms. Large firms may find it disadvantageous to engage in an "R&D race" with small firms, as they can obtain access to innovation through acquisition. Our model and evidence also show that the R&D responsiveness of firms increases with demand, competition, and industry merger and acquisition activity. All of these effects are stronger for smaller firms than for larger firms.]

We examine the importance of industry to firm-level financial and real decisions. We find that in addition to standard industry fixed effects, financial structure also depends on a firm's position within its industry. In competitive industries, a firm's financial leverage depends on its natural hedge (its proximity to the median industry capital-labor ratio), the actions of other firms in the industry, and its status as entrant, incumbent, or exiting firm. Financial leverage is higher and less dispersed in concentrated industries, where strategic debt interactions are also stronger, but a firm's natural hedge is not significant. Our results show that financial structure, technology, and risk are jointly determined within industries. These findings are consistent with recent industry equilibrium models of financial structure.

We examine whether sharp debt increases through leveraged buyouts and recapitalizations interact with market structure to influence plant closing and investment decisions of recapitalizing firms and their rivals. We take into account the fact that recapitalizations and investment decisions are both endogenous and may be simultaneously influenced by the same exogenous events. Following their recapitalizations, firms in industries with high concentration are more likely to close plants and less likely to invest. Rival firms are less likely to close plants and more likely to invest when the market share of leveraged firms is higher.

This paper tests for changes in firms' production and pricing decisions in four industries in which firms have sharply increased their financial leverage. The analysis of product price and quantity data shows that industry product market decisions are associated with capital structure. In three industries, output is negatively associated with the average industry debt ratio. In the one industry which shows a positive association between output and debt ratios, rival firms have low financial leverage and entry barriers are relatively low. Analysis of executive compensation data supports the hypothesis that managers' incentives to maximize shareholders' wealth increase following recapitalization.

We examine the relation between venture capital (VC) investments, M&A activity, and merger competition laws in 45 countries around the world. We find evidence of a strong positive association between VC investments and lagged M&A activity, consistent with an active M&A market providing viable exit opportunities for VC companies and therefore incentives for venture capitalists to invest. We also explore the effects of country-level merger competition laws and pro-takeover legislation passed internationally on VC activity. We find significant reductions in VC activity in countries with stricter competition laws and find that VC activity intensifies after the enactment of country-level takeover-friendly legislation. (JEL G15, G24, D43, K21, L26)

We examine the importance of industry to firm-level financial and real decisions. We find that in addition to standard industry fixed effects, financial structure also depends on a firm's position within its industry. In competitive industries, a firm's financial leverage depends on its natural hedge (its proximity to the median industry capital--labor ratio), the actions of other firms in the industry, and its status as entrant, incumbent, or exiting firm. Financial leverage is higher and less dispersed in concentrated industries, where strategic debt interactions are also stronger, but a firm's natural hedge is not significant. Our results show that financial structure, technology, and risk are jointly determined within industries. These findings are consistent with recent industry equilibrium models of financial structure. Copyright 2005, Oxford University Press.

We show that firms with more illiquid real assets have a higher cost of capital. This effect is stronger when real illiquidity arises from lower within-industry acquisition activity. Real asset illiquidity increases the cost of capital more for firms that face more competition, have less access to external capital, or are closer to default, and for those facing negative demand shocks. The effect of real asset illiquidity is distinct from that of firms’ stock illiquidity or systematic liquidity risk. These results suggest that real asset illiquidity reduces firms’ operating flexibility and through this channel their cost of capital.

This paper examines long‐term block ownership by corporations and performance changes in firms with corporate block owners. We also examine potential reasons for corporate ownership including benefits in product market relationships, alleviation of financing constraints, and board monitoring by corporate owners. We find the largest significant increases in targets' stock prices, investment, and operating profitability when ownership is combined with alliances, joint ventures, and other product market relationships between purchasing and target firms, especially in industries with high research and development. Our findings are consistent with the conclusion that block ownership by corporations has significant benefits in product market relationships.