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Easy money and competitive industries’ booms and busts

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  • Shang, Longfei
  • Lin, Ji-Chai
  • Yang, Nan

Abstract

Studies have documented that firms in competitive industries tend to invest inefficiently and suffer from booms and busts. We extend the literature by showing that high-sentiment signals from credit markets, an indication of easy money available, prompt firms in competitive industries to borrow and invest more than usual. The resulting excess investments collectively lead to overcapacity and, consequently, to declines in competing firms’ operating and financial performance. In contrast, we find that easy money does not lead to excess investments in consolidated industries. Our findings suggest that competitive industries’ booms and busts are largely driven by easy money from credit markets, and that (easy) financing contributes to their investment inefficiency problem.

Suggested Citation

  • Shang, Longfei & Lin, Ji-Chai & Yang, Nan, 2023. "Easy money and competitive industries’ booms and busts," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 65-85.
    • Handle: RePEc:eee:empfin:v:73:y:2023:i:c:p:65-85
    DOI: 10.1016/j.jempfin.2023.05.007
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    More about this item

    Keywords

    Credit market sentiment; Industry competition; Investment inefficiency; Boom-and-bust cycle;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • P23 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Factor and Product Markets; Industry Studies; Population
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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