Product Market Threat and Corporate Investment

Advances in Pacific Basin Business, Economics, and Finance, 6 27-50

32 Pages Posted: 6 Sep 2018 Last revised: 1 Dec 2019

See all articles by Debarati Bhattacharya

Debarati Bhattacharya

Duquesne University

Wei-Hsien Li

National Central University at Taiwan - Department of Finance

Tai-Yu Chen

National Central University at Taiwan

Date Written: November 30, 2017

Abstract

This paper studies how a firm reacts to the threat from product market competition. Consistent with the strategic equilibrium model, we find that a firm increases investment in response to external product market threats. Further, the paper analyzes whether product market threats lead to an improvement in investment efficiency. When faced with product market competition, we find that firms that are otherwise likely to underinvest (overinvest) increase (increase) their investment significantly (less than the firms that are likely to underinvest) in the next period. However, firms that are predisposed to overinvest do not make cuts in capital expenditure, which indicates that strategic investment is a critical countermeasure for addressing competitive threats for all firms, their inclination to make suboptimal investment decisions notwithstanding. Overall, the evidence supports the predatory risk of waiting and competition and investment efficiency hypotheses. These results are robust to using alternative variable definitions, subsamples, and various test specifications. Additional tests suggest that product market threat partially substitutes for other external monitoring mechanisms designed to manage agency problems.

Keywords: M&As, Corporate Investments, Product Market Threats

JEL Classification: G30, D40

Suggested Citation

Bhattacharya, Debarati and Li, Wei-Hsien and Chen, Tai-Yu, Product Market Threat and Corporate Investment (November 30, 2017). Advances in Pacific Basin Business, Economics, and Finance, 6 27-50. Available at SSRN: https://ssrn.com/abstract=3239600

Debarati Bhattacharya

Duquesne University ( email )

600 Forbes Ave.
Pittsburgh, PA 15282
United States
412.396.2621 (Phone)

HOME PAGE: http://www.duq.edu/academics/schools/business/faculty/bhattacharya-phd-debarati

Wei-Hsien Li (Contact Author)

National Central University at Taiwan - Department of Finance ( email )

No. 300, Jung-da Rd.
Jung-Li
Taoyuan
Taiwan

Tai-Yu Chen

National Central University at Taiwan ( email )

No. 300, Zhongda Road
Chung-Li Taiwan, 32054
Taiwan

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
21
Abstract Views
171
PlumX Metrics