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Investment Efficiency and Product Market Competition

Published online by Cambridge University Press:  27 December 2017

Neal M. Stoughton ,
Kit Pong Wong  and
Long Yi
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 6 , December 2017 , pp. 2611 - 2642
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

This paper was presented at the 2013 Financial Management Association meeting, Fudan University, National Chengchi University, the University of Copenhagen, the Vienna University of Economics and Business, the 2015 China International Conference in Finance, the 2015 Belarusian Economic Research and Outreach Center conference, and the 2016 Finance Down Under conference. We thank discussants Dalida Kadyrzhanova, Sandy Klasa, Bryan Lim, and Dong Yan for very helpful discussions as well as for providing the Census HHI data. We also thank Paul Malatesta (the editor) and Gordon Phillips (the referee) for their useful comments and suggestions.

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