Product market competition and corporate investment: Evidence from China

1. Product market competition and corporate investment: Evidence from China Journal of Corporate Finance35 (2015) 196–210 • ——By Fuxiu Jiang, Kenneth A. Kim, John R. Nofsinger, Bing Zhu 姓名：邵莎莎 学号：16720775

2. Introdution Abstract CONTENTS Theoretical framework & Hypothesis development Basic Information Data & Empirical approach Empirical results Conclusions Innovation & Validity

3. 01 Abstract

4. Abstract We find a positive relation betweenproduct market competition and corporate investmentusing a sample of Chinese manufacturing firms during 1999–2010. A quasi-natural experiment and change regressions yield consistent evidence. We postulate that China's high and predictable growth rate, as it transitions from a developing economy to a developed economy, is what drives the positive relation between competition and investment. We directly test and provide support for this growth-oriented explanation. We also find that high investment under high competition is a value-enhancing proposition for firms. Finally, we test whether some firm types are more likely to invest under high competition in a growing economy, and we find that firms with high predation risk and firms that are industry leaders invest more.

5. 02 Introdution

6. point 01 point 02 KEY WORDS point 04 point 03 Introdution Akdoğu and MacKay (2008) studied U.S. manufacturing firms. They find a positive relation between competition and investment, but the positive relation is strongest for firms in oligopolies. It is often argued that the relation between product market competition and corporate investment is conditioned on firm-specific,industry-specific, or environment-specific factors. Recently, scholars have begun to study how globalization affects corporate investment (e.g., Frésard and Valta, 2015; Mello and Wang, 2012). Globalization implies increased competition. When the value of the wait option is higher than the NPV, firms will delay investment. China's economy has been experiencing high and predictable growth. That predictability reduces the uncertainty of the wait option, further reducing its value. Thus, firms in a high and predictable growth environment will invest sooner when facing high competition.

7. 03 Basic Information

8. This paper explores the relation between product market competetition and corporate investment, postulates that China's high and predictable growth rate is a driving factor in the relation between competition and investment. Research Problem With the development of globalization, market competition has intensified and corporate investment has changed. In 2000s,there is no paper that study environment growth,competetiton and investment.This article explores the relationship between the three factors under different nature of companies. Research Significance Basic Information

9. Theoretical framework & Hypothesis development 04

10. Theoretical framework firms in competitive industries invest quicker than those in monopolistic industries.(Akdoğu & MacKay, 2008) the value of deferring investment must be weighed against the threat of losing those opportunities to competitors, i.e., predation risk. The threat increases as the competition rises. A When deciding on irreversible capital investments, the option to wait has greater value when future growth is highly uncertain.Waiting allows more information to be revealed. B Greater uncertainty lowers investment because firms wait for more information and lower the size of risky capital projects.

11. Hypothesis development Authors infer from general framework that under low uncertainty, the option to wait has decreased value. Growth in China has been very high. High growth rates make capital projects valuable because of their high net present values. The low uncertainty of those cash flows will reduce the value of the wait-option. The growth in China has been high and constant over the past couple of decades. Since its economic reforms in late 1979,China's economy experienced remarkable growth.

12. Hypothesis Capital investment will be high when competition is high in a predictably high growth environment. This positive relationship between competition and investment will also be stronger for firms facing predation risk.

13. 05 Data & Empirical approach

14. Data Data sources Study sample is composed of manufacturing firms listed during 1999–2010.Financial statement data came from the China Stock Market and Accounting Research database. Tariff rates data came from the Trade Analysis and Information System.

15. Empirical approach Table 1 Variable definitions

16. Model 1 Model 2 Model 3 Empirical approach What is the relation between product market competition and corporate investment? 3 1 Which firms invest more under high competition? Market competition's proxies:N,CR4,MKTSIZE,ENTCOST Does high growth drive the positive relation between competition and investment? 2 Environment growth's proxies:HI_FIRM_GROWTH,HI_INDUSTRY_GROWTH,HI_PROVINCE_GROWTH,HI_COUNTRY_GROWTH

17. Empirical approach Table 2 Summary statistics The correlation of N with HHI and CR4 is −0.503 and −0.774, respectively, and both correlations are significant at the 1% level, suggesting that the number of the firms in an industry is also a useful way of measuring an industry's level of product market competition. The correlation between HHI and CR4 is 0.884, significant at the 1% level. *** denotes statistical significance at the 1% level The panel reports higher mean and median INVEST for the low HHI subsample and high N subsample, indicating that high product market competition is positively correlated with corporate investment.

18. 06 Empirical results

19. Empirical results What is the relation between product market competition and corporate investment? Table 3 (1) ： The parameter coefficient on HHI is negative and statistically significant at the 1% level. That is, product market competition and corporate investment are positively related. (2) ： Based on Fama and MacBeth (1973) regressions. The HHI variable is again statistically significant. (3) (4)： The parameter coefficient on N is positive and statistically significant at the 1% level. That is, product market competition and corporate investment are positively related. *** and ** denote statistical significance at the 1% and 5% levels, respectively.

20. Empirical results What is the relation between product market competition and corporate investment? Table 4 (5) (6)：The parameter coefficient on CR4 is negative and statistically significant at the 1% level. That is, product market competition and corporate investment are positively related. (7)：The MKTSIZE coefficient is significantly positive, which indicates that larger markets are associated with more investment. (8) ：ENTCOST has a significantly negative coefficient, which suggests that higher entry barriers lead to lower investment. *** and ** denote statistical significance at the 1% and 5% levels, respectively.

21. Empirical results Does high growth drive the positive relation between competition and investment? Table 5 (1) ：When firms experience both high product market competition and high growth, they invest more. (2)(3)(4)(5)：When we use a different proxy to identify firms with high growth, the finding is the same(They invest more). ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.

22. Empirical results Which firms invest more under high competition? Table 6 (1) ：High predation risk invest more when competition is high(i.e., the interaction terms between HHI and LOW_K/L_DIFF are negative and statistically significant) (2)： Industry leaders invest more when competition is high (i.e., the interaction terms of HHI with LEADER are negative and statistically significant) ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels, respectively.

23. 07 Conclusions

24. 1 The positive relation between product market competition and corporate investment in China is due to its high growth rate. 2 Firms with the highest predation risk have the strongest competition and investment relationship. Industry leaders are particularly quick to invest when facing competition. Conclusions

25. 08 Innovation & Validity

26. Innovation In order to test the main premise of the hypothesis(China's high growth rate is what drives the positive relation between product market competition and corporate investment),authors create dummy variables to indicate when and which firms,industries, and provinces have high growth rates, and also when the country has high growth rates.And to identify firms that are industry leaders, authors create the dummy variable LEADER, which equals 1 if the firm is in the top 15% of its industry in terms of sales. Innovation & Validity

27. Validity Innovation & Validity Internal validity 1.Proper empirical analysis. 2.Hypothetical model design. External Validity 1.The result applies to China. 2.The result doesn't necessarily apply to other countries(disadvantage).

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