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Does Firm Investment Respond to Peers' Investment?

55 Pages Posted: 23 Aug 2016 Last revised: 3 Aug 2017

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Laurent Frésard

University of Maryland - Robert H. Smith School of Business

Date Written: August 2, 2017

Abstract

Yes, it responds positively. Using a new instrumental variable based on the presence of location specific information externalities, we estimate that firms increase investment by 10% in response to a one standard-deviation increase 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 compete and use peers' investment as a source of information about product market fundamentals. The positive influence of peers' investment could amplify variation in aggregate investment and thus affect productivity and output.

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? (August 2, 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)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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