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The Impact of Market Power and Financial Flexibility on Corporate Investment Policy

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  • Fliers, Philip T.

Abstract

This study explores how market power and financial flexibility shape corporate investment policies among U.S. large and mature corporations, by estimating firm-specific, time-varying investment-to-added-value sensitivities. We find that firms with market power exhibit lower investment sensitivities, and this effect is more pronounced for the most financially flexible firms. We show that the firm's debt capacity is an important moderator in the relationship between market power and investment sensitivities. Our findings support theoretical predictions that market power and financial flexibility jointly influence investment decisions. The implication is that a lack of competition impedes corporate investments. For investors, these findings highlight the need to monitor both the competitive landscape and financial flexibility of firms in their portfolios.

Suggested Citation

  • Fliers, Philip T., 2024. "The Impact of Market Power and Financial Flexibility on Corporate Investment Policy," QBS Working Paper Series 2024/07, Queen's University Belfast, Queen's Business School.
    • Handle: RePEc:zbw:qmsrps:202407
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    File URL: https://www.econstor.eu/bitstream/10419/302049/1/wps-2024-07.pdf
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    More about this item

    Keywords

    Investments; market power; financial flexibility; added-value; debt capacity;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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