Skip to main content Accessibility help

Investment Efficiency and Product Market Competition

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


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.


Corresponding author

* Stoughton (corresponding author),, WU (Vienna University of Economics and Business) Department of Finance, Accounting and Statistics; Wong,, University of Hong Kong School of Economics and Finance; Yi,, Hong Kong Baptist University Department of Finance and Decision Sciences.


Hide All

This paper was presented at the 2013 Financial Management Association meeting, Fudan University, National Chengchi University, the University of Copenhagen, the Vienna University of Economics and Business, the 2015 China International Conference in Finance, the 2015 Belarusian Economic Research and Outreach Center conference, and the 2016 Finance Down Under conference. We thank discussants Dalida Kadyrzhanova, Sandy Klasa, Bryan Lim, and Dong Yan for very helpful discussions as well as for providing the Census HHI data. We also thank Paul Malatesta (the editor) and Gordon Phillips (the referee) for their useful comments and suggestions.



Hide All
Ahern, K. R., and Harford, J.. “The Importance of Industry Links in Merger Waves.” Journal of Finance, 69 (2014), 527576.
Akdoğu, E., and MacKay, P.. “Investment and Competition.” Journal of Financial and Quantitative Analysis, 43 (2008), 299330.
Ali, A.; Klasa, S.; and Yeung, E.. “The Limitations of Industry Concentration Measures Constructed with Compustat Data: Implications for Finance Research.” Review of Financial Studies, 22 (2009), 38393871.
Ali, A.; Klasa, S.; and Yeung, E.. “Industry Concentration and Corporate Disclosure Policy.” Journal of Accounting and Economics, 58 (2014), 240264.
Chen, Q.; Goldstein, I.; and Jiang, W.. “Price Informativeness and Investment Sensitivity to Stock Price.” Review of Financial Studies, 20 (2007), 619650.
Darrough, M. N.Disclosure Policy and Competition: Cournot vs. Bertrand.” Accounting Review, 68 (1993), 534561.
Darrough, M. N., and Stoughton, N. M.. “Financial Disclosure Policy in an Entry Game.” Journal of Accounting and Economics, 12 (1990), 219243.
Dow, J., and Gorton, G.. “Stock Market Efficiency and Economic Efficiency: Is There a Connection?Journal of Finance, 52 (1997), 10871129.
Fan, J. P., and Goyal, V. K.. “On the Patterns and Wealth Effects of Vertical Mergers.” Journal of Business, 79 (2006), 877902.
Foucault, T., and Frésard, L.. “Corporate Strategy, Conformism, and the Stock Market.” Working Paper No. FIN-2015-1099, HEC Paris (2016).
Gal-Or, E.Information Transmission-Cournot and Bertrand Equilibria.” Review of Economic Studies, 53 (1986), 8592.
Giroud, X., and Mueller, H. M.. “Does Corporate Governance Matter in Competitive Industries?Journal of Financial Economics, 95 (2010), 312331.
Giroud, X., and Mueller, H. M.. “Corporate Governance, Product Market Competition, and Equity Prices.” Journal of Finance, 66 (2011), 563600.
Hoberg, G., and Phillips, G. M.. “Product Market Synergies and Competition in Mergers and Acquisitions: A Text-based Analysis.” Review of Financial Studies, 23 (2010a), 37733811.
Hoberg, G., and Phillips, G. M.. “Real and Financial Industry Booms and Busts.” Journal of Finance, 65 (2010b), 4586.
Hoberg, G., and Phillips, G. M.. “Text-Based Network Industries and Endogenous Product Differentiation.” Journal of Political Economy, 124 (2016), 14231465.
Hou, K., and Robinson, D. T.. “Industry Concentration and Average Stock Returns.” Journal of Finance, 61 (2006), 19271956.
Hwang, H.-S.Optimal Information Acquisition for Heterogenous Duopoly Firms.” Journal of Economic Theory, 59 (1993), 385402.
MacKay, P., and Phillips, G. M.. “How Does Industry Affect Firm Financial Structure?Review of Financial Studies, 18 (2005), 14331466.
Menzly, L., and Ozbas, O.. “Market Segmentation and Cross-Predictability of Returns.” Journal of Finance, 65 (2010), 15551580.
Morck, R.; Yeung, B.; and Yu, W.. “The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?Journal of Financial Economics, 58 (2000), 215260.
Morellec, E.; Nikolov, B.; and Zucchi, F.. “Competition, Cash Holdings, and Financing Decisions.” Working Paper, Swiss Finance Institute (2013).
Nickell, S. J.Competition and Corporate Performance.” Journal of Political Economy, 104 (1996), 724746.
Peress, J.Product Market Competition, Insider Trading, and Stock Market Efficiency.” Journal of Finance, 65 (2010), 143.
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187217.
Richardson, S.Over-Investment of Free Cash Flow.” Review of Accounting Studies, 11 (2006), 159189.
Schumpeter, J. A. Capitalism, Socialism and Democracy. New York, NY: Harper & Row (1962).
Singh, N., and Vives, X.. “Price and Quantity Competition in a Differentiated Duopoly.” RAND Journal of Economics, 15 (1984), 546554.
Subrahmanyam, A., and Titman, S.. “The Going-Public Decision and the Development of Financial Markets.” Journal of Finance, 54 (1999), 10451082.
Sundaram, A. K.; John, T. A.; and John, K.. “An Empirical Analysis of Strategic Competition and Firm Values the Case of R&D Competition.” Journal of Financial Economics, 40 (1996), 459486.
Sutton, J. Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge, MA: MIT Press (1991).
Verrecchia, R. E.Discretionary Disclosure.” Journal of Accounting and Economics, 5 (1983), 179194.
Vives, X.Aggregation of Information in Large Cournot Markets.” Econometrica, 56 (1988), 851876.
Vives, X.Innovation and Competitive Pressure.” Journal of Industrial Economics, 56 (2008), 419469.
Type Description Title
Supplementary materials

Stoughton et al supplementary material
Internet Appendix

 PDF (98 KB)
98 KB


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed