Does Firm Investment Respond to Peers' Investment?

60 Pages Posted: 23 Aug 2016 Last revised: 2 Jan 2018

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

Yes, it responds positively. Using a new instrumental variable approach, we estimate that firms increase investment in response to increases in the investment of their product market peers. The influence of peers' investment is stronger in concentrated industries, featuring more heterogeneous firms, and for relatively smaller firms that possess less precise information. These findings are consistent with a model in which firms' managers have imperfect information about fundamentals and use peers' investment as a source of information, creating endogenous complementarity among investment decisions. This complementarity could amplify the effect of idiosyncratic or aggregate shocks within and across industries.

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. 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 )

Lugano, 900
Switzerland

Swiss Finance Institute ( email )

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

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