Negative uncertainty sensitivity of investment and market structure
2016
Shima, Keiichi
This paper examines how industry competition changes the sensitivity of investment to uncertainty using Japanese firm data. A switching regression model is employed to test the predictions of the real options theory regarding the uncertainty–investment relationship under different industry competition attributes. We find that the negative uncertainty sensitivity of investment is increased by industry concentration, but decreased by market share. The latter finding supports the view of strategic investment behavior of rival firms under uncertainty, rather than the erosion of option values by competition.
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