Tuesday, September 25, 2018

Do Firms Strategically Announce Capacity Expansions to Deter Entry?

Matthew J. Bloomfield, The Wharton School of the University of Pennsylvania and Marcel Tuijn, Erasmus University Rotterdam (EUR); University of Chicago - Booth School of Business ask Do Firms Strategically Announce Capacity Expansions to Deter Entry?

ABSTRACT: Using plausibly exogenous variation in entry threats, we provide evidence that firms strategically preannounce capacity expansions to deter entry into their product markets. To do so, we first construct a novel text-based measure of voluntary disclosure that reflects firms’ explicit forward-looking statements about capacity expansion plans. We validate our measure, and demonstrate that such disclosures are credible, by showing that it accurately predicts increases in capacity, as captured by CAPEX, PP&E, sales, COGS, and inventories. We then show that firms respond to heightened entry threats by announcing capacity expansions. Consistent with our predictions, larger firms are more likely to respond in this fashion, while firms with more private information about industry prospects are less likely to respond in this fashion. Capacity expansion announcements appear to be effective at deterring entry.


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