The effect of managerial ability on product market competition and corporate investment decisions

Abstract

PurposeThis study aims to examine the effect of managerial ability on product market competition and corporate investment decisions, specifically, on risk-taking and investment efficiency.Design/methodology/approachThe primary measure of managerial ability is Demerjian et al. model. In this study, Herfindahl–Hirschman Index is used to measure product market competition. Regression analysis is used to examine the association between corporate risk-taking and over-investment of free cash flow and product market competition and managerial ability.FindingsUsing firm-year observations from 2011 to 2015, the paper findings suggest that competition discourages managers to invest in risky investment. The study also found that managerial ability has no effect on the association between product market competition and investment decision.Originality/valueThe current study almost is the first study which is conducted on this subject; the results may give strength to further studies.