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Investment and Competition

Published online by Cambridge University Press:  06 April 2009

Evrim Akdoğu  and
Peter MacKay
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 2 , June 2008 , pp. 299 - 330
Copyright
Copyright © School of Business Administration, University of Washington 2008

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