Does Firm Investment Respond to Peers’ Investment?

M. Cecilia Bustamante () and Laurent Frésard ()
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M. Cecilia Bustamante: University of Maryland, College Park, Maryland 20742
Laurent Frésard: University of Maryland, College Park, Maryland 20742; University of Lugano, Swiss Finance Institute, Lugano 6900, Switzerland

Management Science, 2021, vol. 67, issue 8, 4703-4724

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)
Date: 2021
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:8:p:4703-4724

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