This paper studies how a firm reacts to the threat from product market competition. Consistent with the strategic equilibrium model, we find that a firm increases investment in response to external product market threats. Further, the paper analyzes whether product market threats lead to an improvement in investment efficiency. When faced with product market competition, we find that firms that are otherwise likely to underinvest (overinvest) increase (increase) their investment significantly (less than the firms that are likely to underinvest) in the next period. However, firms that are predisposed to overinvest do not make cuts in capital expenditure, which indicates that strategic investment is a critical countermeasure for addressing competitive threats for all firms, their inclination to make suboptimal investment decisions notwithstanding. Overall, the evidence supports the predatory risk of waiting as well as competition and investment efficiency hypotheses. Additional tests suggest that product market threat partially substitutes for other external monitoring mechanisms designed to manage agency problems.
We thank Henry Hongren Huang, Hung-Neng Lai, and Carl Hsin-han Shen for their valuable comments. We also thank Professor Hoberg and Professor Phillips for making their Product Market Fluidity and Text-based Network Industry Classifications data available. The usual disclaimers apply.
Bhattacharya, D., Chen, T. and Li, W. (2018), "Product Market Threat and Corporate Investment", Advances in Pacific Basin Business, Economics and Finance (Advances in Pacific Basin Business, Economics and Finance, Vol. 6), Emerald Publishing Limited, pp. 27-50. https://doi.org/10.1108/S2514-465020180000006002Download as .RIS
Emerald Publishing Limited
Copyright © 2018 Emerald Publishing Limited