Corporate Investment and Innovation in the Presence of Competitor Constraints
67 Pages Posted: 10 Mar 2016 Last revised: 13 Aug 2017
Date Written: August 11, 2017
We study the relation between investment behavior and competitor financial constraints. Using inter-firm patent citations and text-based product market similarities to identify intransitive competitor networks, we find that firms increase investment spending, patenting activity, and employee poaching when competitor constraints become more binding. In addition, firms shift their investment composition (product market and patent portfolios) towards competitors who experience a relative tightening of constraints. These effects are robust to controlling for selection and correlated effects across competitors. To mitigate endogeneity concerns, we exploit the 2004 AJCA tax holiday and the 1989 junk bond crisis as exogenous shocks to competitor constraints and find similar effects.
Keywords: Financial Constraints, Investment, Competition, R&D, Product Markets, Patents
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