How Does Corporate Investment Respond to Increased Entry Threat?
University of Maryland - Robert H. Smith School of Business
University of Geneva and Swiss Finance Institute
February 11, 2015
We study how product market interactions affect investment. We use reductions of import tariffs to examine how incumbents modify investment when the threat of rivals' entry intensifies. Incumbents reduce investment by 7.2% in response to higher entry threat. Consistent with theory, the investment reduction varies across market structures: It concentrates in markets where competitive actions are strategic substitutes, where deterring entry is costly, and where investment makes incumbents look soft. Incumbents only reduce tangible investment which comprises commitment value, but do not reduce intangible investment. Our results provide novel evidence on how and why firms' interactions influence corporate investment.
Number of Pages in PDF File: 55
Keywords: Corporate investment, Entry Threat, Strategic Interactions, Market Structures
JEL Classification: G15, G34, G31
Date posted: March 16, 2012 ; Last revised: February 12, 2015
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