This paper characterizes how firms' strategic interaction in product markets affects the industry dynamics of investment and expected returns. In imperfectly competitive industries, a firm's exposure to systematic risk is affected by both its own investment strategy and the investment strategies of its peers, so that the dynamics of its expected returns depend on the intraindustry value spread. In the model and the data, firms' betas and returns correlate more positively in industries with low value spread, low dispersion in operating markups, and low concentration.

This paper studies how expected returns interact with product market competition. The model predicts that (1) competition erodes markups, such that firms are more exposed to systematic risk; (2) the threat of entry by new firms lowers exposure to systematic risk of incumbents; and (3) higher industry aggregate risk represents a barrier to entry, such that riskier industries become less competitive. We provide empirical evidence consistent with these three channels and for an overall negative relation between returns and competition. We also consider a sample selection correction for publicly listed firms and use it to construct an alternative concentration measure.

This paper develops a real options model in which firms may use the timing of their initial public offerings (IPOs) to signal the quality of their investment prospects to outside investors. When adverse selection is more relevant (cold markets), firms with better investment prospects accelerate their IPO relative to their perfect information benchmark to reveal their type to outside investors. When adverse selection is less relevant (hot markets), all firms issue simultaneously, issuers are younger on average, and IPO timing is uninformative. An extension with multiple signals and the empirical evidence show that better ranked firms are younger, issue a lower fraction of shares, and underprice more during cold markets, and that issuers are younger on average during hot markets.

This paper provides a structural approach to testing investment equations based on the log-likelihood function of a nonlinear investment rule. The analysis integrates the predictions of the q -theory for the commonly studied active region of investment and provides new inferences on how real and financing frictions affect the probability that a firm invests. The empirical findings are consistent with the macro-finance literature suggesting that q -theory models with nonconvex investment frictions better explain the data. I also find that both real and financing costs of investment are related to the capital intensity of the industry in which firms operate.

This paper characterizes how firms' strategic interaction in product markets affects the industry dynamics of investment and expected returns. In imperfectly competitive industries, a firm's exposure to systematic risk is affected by both its own investment strategy and the investment strategies of its peers, so that the dynamics of its expected returns depend on the intraindustry value spread. In the model and the data, firms' betas and returns correlate more positively in industries with low value spread, low dispersion in operating markups, and low concentration.

How does lending-market competitiveness shape new firms’ financing? Using a unique U.S. representative panel of new firms, we document that in more concentrated local lending markets: (a) new firms are less likely to access credit; (b) new firms have lower leverage; and (c) the best-performing firms are more severely affected by reduced debt financing. We develop a contingent-claims model with monopolistically competitive banks that rationalizes these facts and shows how credit-market conditions determine loan fees and concentration. Our findings highlight banks’ market power as a channel through which the financial sector influences firms’ development and, hence, economic growth.

This paper shows that product market competition has two opposing effects on asset returns. The first relates to the pro-cyclical nature of the value destruction from expansion of competitors, which lowers exposure to systematic risk in more competitive industries. The second is related to the narrower profit margins due to competition, which increase exposure to systematic risk. We find that the first effect dominates the second, so that firms in more competitive industries generally earn lower asset returns. Our results are robust to using five alternative measures of competition and to controlling for the sample selection bias of publicly-listed firms.

We study managerial incentive provision under moral hazard when growth opportunities arrive stochastically and pursuing them requires a change in management. A trade‐off arises between the benefit of always having the “right” manager and the cost of incentive provision. The prospect of growth‐induced turnover limits the firm's ability to rely on deferred pay, resulting in more front‐loaded compensation. The optimal contract may insulate managers from the risk of growth‐induced dismissal after periods of good performance. The evidence for the United States broadly supports the model's predictions: Firms with better growth prospects experience higher CEO turnover and use more front‐loaded compensation.