Learning from Other Firms' Investments: Corporate Governance and Firm Entry
28 Pages Posted: 4 Dec 2013 Last revised: 19 Mar 2015
Date Written: March 18, 2015
We propose that potential entrants learn about industry conditions from observing the investment behavior of established firms. Strong corporate governance at established firms facilitates learning spillovers. Empirically, we find that industries experience more entry if incumbent firms invest more. The sensitivity of entry to investment activity is much higher in industries with strong corporate governance. Moreover, consistent with the learning hypothesis, the effects are strongest for industries with less informative stock prices and when exposure to industry-level uncertainty is high.
Keywords: Corporate Governance, Information Spillovers, Firm Entry, Product Market Competition, Corporate Investment.
JEL Classification: G31, D83, L10
Suggested Citation: Suggested Citation