Investment strategy

Product market

Business

Psychology

Externality

Economics

Microeconomics

Political science

Market liquidity

Complementarity (molecular biology)

Geometry

Investment (military)

Incentive

Peer effects

Mathematics

Industrial organization

Genetics

Monetary economics

Social psychology

Biology

Product (mathematics)

Politics

Management Science

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. This paper was accepted by Gustavo Manso, finance.

Does Firm Investment Respond to Peers’ Investment?