Investment Efficiency and Product Market Competition

56 Pages Posted: 21 Jul 2015 Last revised: 12 May 2016

See all articles by Neal Stoughton

Neal Stoughton

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Kit Pong Wong

University of Hong Kong

Long Yi

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

Date Written: January 1, 2016

Abstract

Does more competition lead to more information production and greater investment efficiency? This question is largely unexplored in the finance literature. This paper provides both a model and a series of extensive empirical tests. The model features a two-stage Bayesian game in differentiated products market competition. We find that competition causes firms to acquire less information and investments become more inefficient relative to a first best case with the same market structure. Empirically investment efficiency is measured by a latent variable technique. The panel regression analysis provides strong support for the theory and shows that investment is more efficient in concentrated industries, after controlling for firm characteristics, and utilizing various alternative specifications for concentration.

Suggested Citation

Stoughton, Neal M. and Wong, Keith Kit Pong and Yi, Long, Investment Efficiency and Product Market Competition (January 1, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2633437 or http://dx.doi.org/10.2139/ssrn.2633437

Neal M. Stoughton (Contact Author)

Vienna University of Economics and Business ( email )

Austria

Vienna Graduate School of Finance (VGSF) ( email )

Austria

Keith Kit Pong Wong

University of Hong Kong ( email )

Faculty of Business and Economics
University of Hong Kong
Hong Kong, Nil Nil
Hong Kong
(852) 2859-1044 (Phone)
(852) 2548-1152 (Fax)

Long Yi

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )

Hong Kong

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