Investment Efficiency and Product Market Competition
56 Pages Posted: 21 Jul 2015 Last revised: 12 May 2016
Date Written: January 1, 2016
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.
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