Investment Efficiency and Product Market Competition

Neal M. Stoughton, Kit Pong Wong and Long Yi

Journal of Financial and Quantitative Analysis, 2017, vol. 52, issue 6, 2611-2642

Abstract: Does more competition lead to more information production and greater investment efficiency? This question is largely unexplored in the finance literature. This article provides both a model and a series of extensive empirical tests. The model features a 2-stage Bayesian game in differentiated products market competition. We find that competition causes firms to acquire less information and investments to become more inefficient relative to a first-best case with the same market structure. Empirically, the panel regression analysis provides strong support for the theory and shows that investment is more efficient in concentrated industries.

Date: 2017
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