Local Peer Effects and Corporate Investment

50 Pages Posted: 17 Aug 2018

See all articles by Yangming Bao

Yangming Bao

Goethe University Frankfurt

Martin Richard Goetz

Goethe University Frankfurt - Research Center SAFE

Date Written: July 7, 2018

Abstract

We examine how a firms' investment behavior affects the investment of a neighboring firm. Economic theory yields ambiguous predictions regarding the direction of firm peer effects and consistent with earlier work, we find that firms display similar investment behavior within an area using OLS analysis. Exploiting time-variation in the rise of U.S. states' corporate income taxes and utilizing heterogeneity in firms' exposure to increases in corporate income tax rates, we identify the causal impact of local firms' investments. Using this as an instrumental variable in a 2SLS estimation, we find that an increases in local firms' investment reduces the investment of a local peer firm. This effect is more pronounced if local competition among firms is stronger and supports theories that firm investments are strategic substitutes due to competition.

Keywords: Investments, Peer Firm Effects, Agglomeration, Corporate Income Tax

JEL Classification: G31, G38

Suggested Citation

Bao, Yangming and Goetz, Martin Richard, Local Peer Effects and Corporate Investment (July 7, 2018). SAFE Working Paper No. 220. Available at SSRN: https://ssrn.com/abstract=3230794 or http://dx.doi.org/10.2139/ssrn.3230794

Yangming Bao

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Martin Richard Goetz (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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