Do Firms Strategically Announce Capacity Expansions to Deter Entry?

Abstract

Using plausibly exogenous variation in Chinese imports, we provide evidence that firms strategically announce capacity expansions when facing entry threats. We first construct and validate a novel text-based measure of voluntary disclosure that reflects firms’ explicit forward-looking statements about capacity expansion plans. 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 more opaque firms are less likely to respond in this fashion. Our results cannot be explained by an overall increase in transparency/disclosure; we observe no increase overall disclosure. Thus, our results are unlikely to be driven by investors’ demand for information, but rather firms’ strategic choices to supply information in order to protect their product markets. Capacity expansion announcements appear to be effective at deterring entry.