Does Firm Investment Respond to Peers’ Investment?

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. This paper was accepted by Gustavo Manso, finance.

Information flows among rivals and corporate investment

“…Consistent with prior work, our results support interfirm learning as a mechanism for more similar investment levels among rivals (e.g., Bustamante and Fresard, 2018). However, this effect does not imply more homogeneous choices in all investment decisions.…”

“…Together, these results point to corporate learning as a plausible mechanism for peer effects in the investment literature (e.g., Bustamante and Fresard, 2018;Roychowdhury et al, 2018).…”

“…A relatively straightforward view is that information signals from rivals' disclosures converge prior beliefs about potential investments (e.g., Lieberman and Asaba, 2006;Devenow and Welch, 1996), which can lead the firm to invest more similarly to rivals. This view has some support from Bustamante and Fresard (2018), who find that firms increase investment in response to increases in the investment of product market peers. They interpret their evidence consistent with a learning perspective, whereby public information about peers creates endogenous complementarity in investment decisions.…”

Is There Mimicking Behavior in Firms’ Trade Credit Decisions?

“…Our main analysis runs two-stage least squares (2SLS) regressions using this variable as an instrument for peer firm behavior. Our results are robust to alternative definitions of the instrument used, including a recently proposed instrumental variable that combines both industry and geography variations in peer trade receivables (Bustamante and Frésard, 2019).…”

Productivity, Managers' Social Connections and the Great Recession

“…At the same time, diversified firms are better able to weather freezes in financial markets due to reallocation of capital inside these firms (Matvos and Seru, 2014;Kuppuswamy and Villalonga, 2016). We hypothesize that firms with more connections were more likely to diversify their scope during the GR, since social connections facilitate the flow of knowledge and affect corporate policies (Granovetter, 2005;Fracassi, 2017;Bustamante and Frésard, 2020).…”