Does Firm Investment Respond to Peers' Investment?

Maria Cecilia Bustamante and Laurent Frésard
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Maria Cecilia Bustamante: University of Maryland - Department of Finance
Laurent Frésard: University of Lugano; Swiss Finance Institute

No 20-43, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks.

Keywords: investment; peer effect; competition; agglomeration economies (search for similar items in EconPapers)
JEL-codes: G31 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2020-05
New Economics Papers: this item is included in nep-bec, nep-com, nep-cse, nep-net, nep-ore and nep-ure
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2043

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