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Firm Heterogeneity, New Investment and Acquisitions
Author(s) -
Spearot Alan C.
Publication year - 2012
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.1467-6451.2012.00477.x
Subject(s) - purchasing , investment (military) , variety (cybernetics) , imperfect , business , industrial organization , productivity , microeconomics , economics , marketing , macroeconomics , linguistics , philosophy , artificial intelligence , politics , political science , computer science , law
This paper presents a model of investment in which heterogeneous firms choose between new investment and acquisitions. New investment involves purchasing a new plant for an existing variety. Acquisitions involve purchasing a plant and a variety from a selling firm. Using a variable‐elasticity demand system, I show that if varieties within a differentiated industry are imperfect substitutes, mid‐productivity firms invest. As varieties approach perfect substitutability, high‐productivity firms invest. For both cases, within the region of investing firms, the most productive choose acquisitions over new investment. In analyzing firm‐level data from C ompustat , I find evidence that supports these predictions.