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http://ssrn.com/abstract=2023029
 
 

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How does Corporate Investment Respond to Increased Entry Threat?


Laurent Frésard


University of Maryland - Robert H. Smith School of Business

Philip Valta


University of Geneva and Swiss Finance Institute

April 30, 2014

HEC Paris Research Paper No. FIN-2014-1046

Abstract:     
This paper uses reductions of import tariffs to examine how incumbents modify their investment decisions when the threat of entry by foreign rivals suddenly intensifies. We find that incumbents significantly reduce investment by 8.6% in response to higher entry threat following tariff reductions. Various tests indicate that this finding is robust and likely causal. Moreover, and in consistency with strategic investment models, we provide evidence suggesting that the reduction of investment is related to strategic motives to influence the competitive behavior of foreign rivals. Overall, the paper provides novel evidence on how strategic interactions in the product market influence firms' investment decisions.

Number of Pages in PDF File: 45

Keywords: Corporate investment, Entry Threat, Tariff Reduction, Strategic Interactions

JEL Classification: G15, G34, G31

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Date posted: March 16, 2012 ; Last revised: May 20, 2014

Suggested Citation

Frésard, Laurent and Valta, Philip, How does Corporate Investment Respond to Increased Entry Threat? (April 30, 2014). HEC Paris Research Paper No. FIN-2014-1046. Available at SSRN: http://ssrn.com/abstract=2023029 or http://dx.doi.org/10.2139/ssrn.2023029

Contact Information

Laurent Frésard (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
College Park, MD 20742
United States
Philip Valta
University of Geneva and Swiss Finance Institute ( email )
Bld du Pont D'Arve 40
Geneva, 1211
Switzerland

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