Product market competition,oil uncertainty and corporate investment

摘要

Purpose - The purpose of this study is to examine the effect of product market competition on the oil uncertainty-investment relation. Design/methodology/approach - The authors use firm-level financial data from the COMPUSTAT database, competition proxies from Hoberg and Phillips (2016) and macroeconomic data on crude oil price uncertainty. Corporate investment is measured as capital expenditure scaled by total assets or as the annual change in (net) total fixed assets plus depreciation. Since our panel data covers a short period (22 years) and the regressions include a combination of a lagged dependent variable and firm fixed effects, the authors apply Blundell and Bond's (1998) GMM system when regressing corporate investment on the interaction between oil uncertainty and competition. Findings - Consistent with the theories in the irreversible investment literature, the authors first show that investments are negatively related to oil uncertainty. Second, they show that firms in competitive industries decrease their investments in response to heightened uncertainty by a higher degree than firms in concentrated industries, suggesting that competition can exacerbate negative investment outcomes when success is uncertain. The authors also examine how competition relates to investment asymmetric reactions to positive and negative oil price return volatilities and find a stronger negative relationships between competition and investment-positive oil price volatility, indicating that increasing the probability of a negative outcome due to uncertainty leads firms to reduce investment to a larger extent. Practical implications - The findings provide useful insights to guide corporate investment decisions under oil price change uncertainty. In particular, if firms can wait for the resolution of uncertainty before deciding to pursue irreversible investment in a competitive market, they can avoid potentially large losses by foregoing investment when the outcomes are unfavorable. This is because competition brings a greater uncertainty to firm performance if the investment outcome is poor, as firms in competitive industries share a large proportion of industry-wide profits with rivals and, thus, competition could erode profit margins and increases the likelihood of being driven out of the market. Hence, firms in competitive markets should balance between strategic preemptive motives and waiting for the resolution of uncertainty before deciding to pursue investment. Originality/value - This study is the first to examine the effect of competition on the relationship between investment and oil price uncertainty. Moreover, it is the first to examine the effect of competition on the asymmetric response of investment to oil price uncertainty emanating from positive and negative changes in oil price.