Abstract
We use inter-firm patent citations to identify competitors and examine the relation between a firm's investment decisions and competitor financial constraints. We find that a one standard deviation increase in competitor constraints is associated with 8.8-13.9% more patent applications. Furthermore, firms appear to shift spending to compete more with constrained competitors. To mitigate endogeneity concerns, we exploit the 2004 AJCA tax holiday and the 1989 junk bond crisis as exogenous shocks to competitor financing constraints and find corroborating evidence. Our findings suggest that ignoring competitor feedback effects when assessing financing related investment distortions underestimates the consequences of being financially constrained.
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