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Firms grow in a competitive environment and competition can be a source of corporate growth. In an increasingly global market, companies face increased competition. As such, it is natural that all firms face some degree of risk due to competition. While firms compete for market share, they also imitate competitors in order to minimize risk that accompanies competition. This research attempts to demonstrate the effects of inter-firm competition on investment decisions. Using idiosyncratic equity returns as the instrument variable, this paper uses a two-stage least squares regression, as well as an ordinary least squares (OLS), to identify the influence of peer firms' investment decisions on a firm's own investment strategy. The results confirm that firms show stronger imitative behavior with more intense competition. Also, firms with higher debt ratios show higher peer group influence. This imitative factor provides clues to measure the risk-averseness in investment decisions.

Peer Firm Effect on Cooperate Investment Decisions