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Corporate Investment and Innovation in the Presence of Competitor Constraints

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  • William Grieser
  • Zack Liu

Abstract

We study the relation between investment behavior and competitor financial constraints. Using interfirm patent citations and text-based product market similarities to identify intransitive competitor networks, we find that firms increase investment spending, patenting activity, and opportunistic hiring when competitor constraints become more binding. In addition, firms shift their investment composition (product market and patent portfolios) to compete more aggressively with relatively constrained competitors. To mitigate endogeneity concerns, we exploit the 2004 AJCA tax holiday and the 1989 junk bond crisis as exogenous shocks to competitor constraints, and we find similar effects. Received August 11, 2017; editorial decision November 6, 2018 by Editor David Denis. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • William Grieser & Zack Liu, 2019. "Corporate Investment and Innovation in the Presence of Competitor Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 32(11), pages 4271-4303.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:11:p:4271-4303.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz021
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    Cited by:

    1. Li, Jay Y. & Tang, Dragon Yongjun, 2022. "Product market competition with CDS," Journal of Corporate Finance, Elsevier, vol. 73(C).
    2. Du, Qingjie & Heo, Yuna, 2022. "Political corruption, Dodd–Frank whistleblowing, and corporate investment," Journal of Corporate Finance, Elsevier, vol. 73(C).
    3. Yu Lu & Rui Liu & Yuhe Cao & Yuhan Li, 2023. "Tax Burden and Corporate Investment Efficiency," Sustainability, MDPI, vol. 15(3), pages 1-16, January.
    4. Roberta Piermartini & Stela Rubínová, 2021. "How much do global value chains boost innovation?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(2), pages 892-922, May.
    5. Dou, Winston Wei & Taylor, Lucian A. & Wang, Wei & Wang, Wenyu, 2021. "Dissecting bankruptcy frictions," Journal of Financial Economics, Elsevier, vol. 142(3), pages 975-1000.
    6. Hu, Xiaoxue & Li, Dongxu, 2022. "Do horizontal mergers affect rivals’ cash holdings?," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 275-298.
    7. Filippo Mezzanotti & Timothy Simcoe, 2023. "Research and/or Development? Financial Frictions and Innovation Investment," Working Papers 23-39, Center for Economic Studies, U.S. Census Bureau.

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