Product Market Competition and Corporate Investment: An Empirical Analysis
52 Pages Posted: 18 Jun 2018 Last revised: 11 Jun 2020
Date Written: June 10, 2020
In this paper, we empirically test the impact of industry concentration on corporate investment. Using both traditional proxies and recently developed text-based measures of industry concentration, we show that firms operating in competitive industries invest significantly more in both physical capital and research and development relative to their peers in concentrated industries. We also find that the propensity to invest less by managers of monopolistic firms is partially mitigated by superior corporate governance that reduces the agency problems related to managerial slack. Our results are consistent with the notion that firms in competitive industries have a greater incentive to invest and innovate relative to the managers of monopolistic firms, where the managers' incentives are to maintain their monopoly rents. Our findings have clear policy implications in that investment and innovation, and hence economic growth, may be adversely affected in the current era of increasing industry concentration and declining competition.
Keywords: Corporate Investments, Competition, Agency Cost, Herfindahl-Hirschman Index (HHI)
JEL Classification: G0, G30, G39
Suggested Citation: Suggested Citation