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How Does Corporate Investment Respond to Increased Entry Threat?

59 Pages Posted: 16 Mar 2012 Last revised: 29 Oct 2015

Laurent Frésard

University of Maryland - Robert H. Smith School of Business

Philip Valta

University of Bern

Date Written: October 28, 2015

Abstract

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 a strategic behavior, 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. Our results provide novel evidence on how and why firms' interactions influence corporate investment.

Keywords: Corporate investment, Entry Threat, Strategic Interactions, Market Structures

JEL Classification: G15, G34, G31

Suggested Citation

Frésard, Laurent and Valta, Philip, How Does Corporate Investment Respond to Increased Entry Threat? (October 28, 2015). Available at SSRN: https://ssrn.com/abstract=2023029 or http://dx.doi.org/10.2139/ssrn.2023029

Laurent Frésard (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Philip Valta

University of Bern ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

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