We study the relation between investment behavior and competitor financial constraints. Using interfirm patent citations and text-based product market similarities to identify intransitive competitor networks, we find that firms increase investment spending, patenting activity, and opportunistic hiring when competitor constraints become more binding. In addition, firms shift their investment composition (product market and patent portfolios) to compete more aggressively with relatively constrained competitors. To mitigate endogeneity concerns, we exploit the 2004 AJCA tax holiday and the 1989 junk bond crisis as exogenous shocks to competitor constraints, and we find similar effects. Received August 11, 2017; editorial decision November 6, 2018 by Editor David Denis.

We investigate the strict-exogeneity assumption, a necessary condition for estimator consistency in many finance panel-data applications. We outline tests for strict exogeneity in both traditional (non–instrumental variable (IV)) and IV settings. When we apply these tests in common traditional finance panel regressions, we find that the strict-exogeneity assumption is often strongly rejected, suggesting large inference errors. We test for strict exogeneity in specific finance panel-data IV settings and illustrate the potential for these tests to help confirm, or rule out, the validity of common panel-data IV estimators. We offer recommendations to address the strict-exogeneity issue in finance research.

We document that firms with greater product similarity to their peers exhibit lower rates of financial fraud. We show that peer similarity is associated with better information environments, which is consistent with monitors’ enhanced ability to benchmark against other firms. The negative relation between product similarity and fraud remains after controlling for alternative mechanisms including incentive compensation structures, competition, and internal and external governance characteristics. Overall, our findings suggest that greater peer similarity increases the marginal cost of fraud, and therefore, ex ante disincentivizing managers from committing fraud.

Agglomeration is positively correlated with productivity and exhibits substantial heterogeneity across industries. Yet, the connection between agglomeration and corporate investment, an important driver of production, remains relatively underexplored. We study this relation using counterfactuals that account for the empirical distribution of industry size and firm locations, and by employing network methods that exploit firm geographic location and patent citation connections. We find a strong positive relation between industry peers’ proximity, investment externalities, uncertainty, and knowledge capital. Collectively, our evidence supports the notion that knowledge spillovers generate positive investment externalities that drive firm location decisions and explain industry-level agglomeration patterns.

We present a spatial econometrics framework for estimating peer effects in capital structure. This approach exploits the heterogeneous and intransitive nature of peer networks to identify economically informative structural coefficients. In models of leverage levels, we detect significant peer-effect leverage coefficients that are on the order of 0.20, indicating a moderate but substantive level of strategic complementarity in capital structure decisions. We argue that prior estimates in the literature substantially overstate the magnitude of the underlying relation. Our evidence is robust to a wide variety of model modifications and supports the hypothesis that leverage is an important strategic choice variable.