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
Date Written: November 30, 2017
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: Suggested Citation