Investment and Competition
Publication Date
10-15-2006
Abstract
This paper examines how industry structure affects corporate investment patterns. Real-options theory shows that deferring irreversible investment in the face of uncertainty is valuable. Theory also shows that the value of waiting to invest falls if investment opportunities are contestable. Consistent with these theories, we find that firms in monopolistic industries exhibit lower investment-q sensitivity and are slower to invest than firms in competitive industries. However, we find that investment-q sensitivity and investment speed are highest in oligopolistic industries, suggesting that the value of investing strategically can outweigh the value of waiting. Indeed, oligopolistic industries experience less entry and more exit than other industries.
Document Type
Article
Keywords
corporate investment, industry structure, competition, real options
Disciplines
Finance
Source
SMU Cox School of Business Research Paper Series
Language
English
