Easy money and competitive industries’ booms and busts

Longfei Shang, Ji-Chai Lin and Nan Yang

Journal of Empirical Finance, 2023, vol. 73, issue C, 65-85

Abstract: Studies have documented that firms in competitive industries tend to invest inefficiently and suffer from booms and busts. We extend the literature by showing that high-sentiment signals from credit markets, an indication of easy money available, prompt firms in competitive industries to borrow and invest more than usual. The resulting excess investments collectively lead to overcapacity and, consequently, to declines in competing firms’ operating and financial performance. In contrast, we find that easy money does not lead to excess investments in consolidated industries. Our findings suggest that competitive industries’ booms and busts are largely driven by easy money from credit markets, and that (easy) financing contributes to their investment inefficiency problem.

Keywords: Credit market sentiment; Industry competition; Investment inefficiency; Boom-and-bust cycle (search for similar items in EconPapers)
JEL-codes: E51 M12 P23 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:73:y:2023:i:c:p:65-85

DOI: 10.1016/j.jempfin.2023.05.007

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