Product markets and corporate investment: Theory and evidence
AbstractInvestment patterns often associated with agency and information problems can emerge as rational responses to product–market rivalry. We illustrate this result when industry players make simultaneous or sequential investment decisions in the face of two negative externalities. One externality arises when all competing firms invest, thus eroding the gains to investment accruing to any one firm. Another externality arises when some firms do not invest and lose out to rivals who do invest. The value of investment therefore depends on the investment’s intrinsic merits and the actions of all competitors. Our analysis can rationalize investment patterns that might appear suboptimal when such externalities are ignored. For instance, our simultaneous model can justify investment levels that might otherwise be interpreted as under- or over-investment. Our sequential model shows that value-maximizing firms might optimally herd in their investment decisions. We present evidence supporting key aspects of both the simultaneous and sequential models.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 36 (2012)
Issue (Month): 2 ()
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Corporate investment; Externality; Herding;
Find related papers by JEL classification:
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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