1. Product market competition and corporate investment:
Evidence from China
Journal of Corporate Finance 35 (2015) 196–210
——By Fuxiu Jiang, Kenneth A. Kim, John R. Nofsinger, Bing Zhu
姓名：邵莎莎
学号：

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

3. 01
Abstract

4. Abstract
We find a positive relation between product market competition and corporate investment using 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. 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.
point 01 02 04 03
KEY WORDS
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.
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.

7. 03
Basic Information

8. Basic Information Research Problem Research Significance
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

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
Greater uncertainty lowers investment because firms wait for more information and lower the size of risky capital projects.
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

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 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.
The low uncertainty of those cash flows will reduce the value of the wait-option.

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 Variable types
Dependent variable
INVEST
Change (from the beginning of the year to the end of the year) in net fixed assets plus depreciation, scaled by beginning-year values.
Independent variables
HHI*
Sum of squared market shares for all firms in the same industry at the beginning of the year. Market share of a firm is the ratio of firm’s sales to industry’s sale. A higher HHI indicates lower product market competition. N
Natural log of number of firms in the industry at the beginning of the year.A higher N suggests a more competitive market.
CR4
The market share of the four largest firms in the industry at the beginning of the year. Market share of a firm is the ratio of firm’s sales to industry’s sales.A higher CR4 represents lower competition.
MKTSIZE
Natural log of the industry’s sales.
ENTCOST
Natural log of weighted average of gross value of cost of property, plant and equipment for firms in the industry, where the weights are the firm’s industry market share.
HI_TQ*
Dummy variable = 1 if firm's TQ is above the median firm's TQ during the same period and industry which is a proxy for growth opportunities.
HI_FIRM(INDUSTRY)_GROWTH
Dummy variable = 1 if firm's sales growth(firm is in an industry whose sales growth) from prior year to current year is above the median firm's(industry's) sales growth rate during the same period and industry.
HI_PROVINCE(COUNTRY)_GROWTH
Dummy variable = 1 if firm is in a province whose GDP growth(country's GDP growth) from prior year to current year is above the median growth rate during the same period.
LOW_K/L_DIFF*
Dummy variable = 1 when a firm’s capital-to-labor ratio (net plant, property, and equipment per employee) at the beginning of the year is below the median absolute difference between firms’ capital-to-labor ratios and the industry’s capital-to-labor ratio during the same year.The dummy variable is a proxy for predation risk.
LEADER*
Dummy variable = 1 if the firm's sales is top 15% of the industry sales at the beginning of the year.
Control variables
SIZE
Natural log of the total assets at the beginning of the year.
CFO
Ratio of current net operating cash flow to net value of fixed assets at the beginning of the year. TQ
Ratio of the sum of market value of tradable shares and book value of nontradable shares to the book value of total assets at the beginning of the year.

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

17. Empirical approach Table 2 Summary statistics
Panel A:Product market competition proxies
# of Obs
Mean
Median
Std dev.
Min
Max
HHI
0.00
0.03
0.40 N
8.83
8.99
1.10
10.47
CR4
0.02
0.01
0.07
1.00
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.
Panel B:Investment split by competition
HHI N
High HHI
Low HHI
Difference
High N
Low N
INVEST(means)
0.245
0.288
-0.043***
0.286
0.254
0.032***
INVEST(medians)
0.124
0.157
-0.033***
0.126
0.031***
*** 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 Table 3
What is the relation between product market competition and corporate investment?
Table 3
(1)
(2)
(3)
(4)
HHI
-0.268***
(-4.98)
-4.495***
(-3.51) N
0.014***
（3.26）
0.016***
（5.56）
CR4
MKTSIZE
ENTCOST
SIZE
0.025***
(4.24)
0.031***
(6.99)
(6.96)
CFO
0.099***
(8.51)
0.111***
(4.18)
(8.50)
0.112*** TQ
0.058***
(9.67)
0.095***
(4.96)
(9.66)
(4.98)
Constant
-0.322***
(-2.18)
-0.560***
(-5.49）
-0.413***
(-3.12)
-0.722***
(-5.84）
Year dummies
Yes No
Industry dummies
Estimation Method
OLS
Fama MacBeth
# of obs.
8732
Adj./avg.R2
0.050
0.049
(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 Table 4
What is the relation between product market competition and corporate investment?
Table 4
(5)
(6)
(7)
(8)
HHI N
CR4
−0.113***
(−4.70)
-0.606***
（-4.19）
MKTSIZE
0.015**
（2.09）
ENTCOST
-0.058**
（-1.98）
SIZE
0.025***
(4.23)
0.031***
(7.04)
0.061***
（5.08）
0.046***
（4.20）
CFO
0.099***
(8.51)
0.112***
(4.19)
0.017
（1.31）
0.092***
（4.70） TQ
0.058***
(9.67)
0.095***
(4.96)
0.091***
（6.40）
0.077***
（5.64）
Constant
-0.322***
(-2.13)
-0.557***
(-5.47）
-1.779***
（-5.39）
0.105
（0.15）
Year dummies
Yes No
Industry dummies
Estimation Method
OLS
Fama MacBeth
# of obs.
8732
8714
6703
Adj./avg.R2
0.050
0.049
0.063
0.067
(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 Table 5
Does high growth drive the positive relation between competition and investment?
Table 5
(1)
(2)
(3)
(4)
(5)
HHI
-0.183***
(-3.33)
-0.093
(-1.61)
-0.301***
(-6.40)
-0.098
（-1.20)
-0.231***
(-8.72)
HHI*HI_TQ
-0.258***
(-4.79)
HHI*HI_FIRM_GROWTH
-0.413***
(-10.90)
HHI*HI_INDUSTRY_GROWTH
-1.782***
(-2.07)
HHI*HI_PROVINCE_GROWTH
-0.285***
(-3.07)
HHI*HI_COUNTRY_GROWTH
-2.216**
(-2.19)
HI_TQ
0.151***
(19.37)
HI_FIRM_GROWTH
0.048***
(3.89)
HI_INDUSTRY_GROWTH
0.014
(1.16)
HI_PROVINCE_GROWTH
-0.008
(-0.62)
HI_COUNTRY_GROWTH
-0.002
(-0.15)
(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 Table 6
Which firms invest more under high competition?
Table 6
(1)
(2)
HHI
-0.041
(-0.60)
-0.208***
(-3.88)
HHI*LOW_K/L_DIFF
-0.515***
(-7.38)
LOW_K/L_DIFF
-0.009
(-0.46)
HHI × LEADER
-0.327***
(-7.74)
LEADER
-0.027**
(-2.11)
(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. Conclusions 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.

25. 08
Innovation & Validity

26. Innovation & Validity 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.

27. Innovation & Validity 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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