Does Firm Investment Respond to Peers' Investment?
60 Pages Posted: 23 Aug 2016 Last revised: 2 Jan 2018
Date Written: December 21, 2017
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: Suggested Citation