Does Firm Investment Respond to Peers' Investment?

56 Pages Posted: 26 May 2020

See all articles by Maria Cecilia Bustamante

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Laurent Frésard

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute

Date Written: December 21, 2017

Abstract

We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks.

Keywords: investment, peer effect, competition, agglomeration economies

JEL Classification: G31

Suggested Citation

Bustamante, Maria Cecilia and Frésard, Laurent, Does Firm Investment Respond to Peers' Investment? (December 21, 2017). Robert H. Smith School Research Paper No. RHS 2827803, Swiss Finance Institute Research Paper No. 20-43, Available at SSRN: https://ssrn.com/abstract=2827803 or http://dx.doi.org/10.2139/ssrn.2827803

Maria Cecilia Bustamante

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://https://sites.google.com/a/rhsmith.umd.edu/mcbustam/?pli=1

Laurent Frésard (Contact Author)

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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