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Does Firm Investment Respond to Peers’ Investment?

Author

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  • M. Cecilia Bustamante

    (University of Maryland, College Park, Maryland 20742)

  • Laurent Frésard

    (University of Maryland, College Park, Maryland 20742; University of Lugano, Swiss Finance Institute, Lugano 6900, Switzerland)

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.

Suggested Citation

  • M. Cecilia Bustamante & Laurent Frésard, 2021. "Does Firm Investment Respond to Peers’ Investment?," Management Science, INFORMS, vol. 67(8), pages 4703-4724, August.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:8:p:4703-4724
    DOI: 10.1287/mnsc.2020.3695
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