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Investment Efficiency and Product Market Competition

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

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.

Suggested Citation

  • Stoughton, Neal M. & Wong, Kit Pong & Yi, Long, 2017. "Investment Efficiency and Product Market Competition," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2611-2642, December.
    • Handle: RePEc:cup:jfinqa:v:52:y:2017:i:06:p:2611-2642_00
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