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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

December 17, 2014

HEC Paris Research Paper No. FIN-2014-1046

Abstract:     
We use large reductions of import tariffs to examine how incumbent firms modify investment when the threat of entry by foreign rivals intensifies. Incumbents reduce investment by 7.2% of capital in response to higher entry threat. This effect is robust, pervasive, and likely causal. Consistent with predictions of strategic investment models, the investment reduction concentrates in markets where competitive actions are strategic substitutes, where deterring entry is costly, and where investment makes incumbents look soft. Moreover, firms only reduce tangible investment which comprises commitment value, but do not reduce intangible investment. Our results provide novel evidence on how and why market structures and strategic interactions influence corporate investment.

Number of Pages in PDF File: 52

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: December 18, 2014

Suggested Citation

Frésard, Laurent and Valta, Philip, How Does Corporate Investment Respond to Increased Entry Threat? (December 17, 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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