The Impact of Product Market Competition on the Value of Corporate Cash Holdings: Empirical Evidence from China

Authors:Xintu Lei, Qingyuan Xu, Xiaoqian Li

Abstract


This paper uses observations of Chinese listed companies in A-share markets of Shanghai and Shenzhen during 2007-2016 as research data, empirically examines the impact of product market competition on the value of corporate cash holdings. Research findings suggest that product market competition can indeed promote increase in the value of cash holdings of Chinese listed companies, such mechanism is mainly caused by the predatory effect of product market competition rather than the governance effect. Further research find that predatory effects and governance effects can be better differentiated by examining financial constraints, the predatory effect tend to be more pronounced in financial constrained companies. Compared to previous studies, this paper reveals the specific mechanism of product market competition in enhancing the value of cash holdings of Chinese listed companies, and examines the impact of financial constraints on this issue.

Full Text:

PDF

References


Aggarwal, R. and A. Samwick. 1999. Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence. Journal of Finance, 54 (6): 1999-2043.

Aghion, P., M. Dewatripont and P. Rey. 2010. Competition, Financial Discipline and Growth. Review of Economic Studies, 66 (4): 825-852.

Alimov, A. 2014. Product Market Competition and the Value of Corporate Cash: Evidence from Trade Liberalization. Journal of Corporate Finance, 25 (2): 122-139.

Almeida, H., M. Campello and M. Weisbach. 2004. The cash flow sensitivity of cash. The Journal of Finance, 59 (4): 1777-1804.

Azmat, Q. and A.M. Iqbal. 2017. The Role of Financial Constraints on Precautionary Cash Holdings: Evidence from Pakistan. Ekonomska Istraživanja, 30 (1): 1-15.

Bates, T.W., K.M. Kahle. and R.M. Stulz. 2009. Why Do U.S. Firms Hold So Much More Cash than They Used to? Journal of Finance, 64 (5): 1985-2021.

Benoit, J.P. 1984. Financially Constrained Entry in a Game with Incomplete Information. Rand Journal of Economics, 15 (4): 490-499.

Bolton, P. and D.S. Scharfstein. 1990. A Theory of Predation Based on Agency Problems in Financial Contracting. The American Economic Review, 80 (1): 93-106.

Boubakri, N., O. Guedhami, D. Mishra, et al. 2012. Political Connections and the Cost of Equity Capital. Journal of Corporate Finance, 18 (3): 541-559.

Chan, W.H., Y. Lu and H.F. Zhang. 2013. The Effect of Financial Constraints, Investment Policy, Product Market Competition and Corporate Governance on the Value of Cash Holdings. Accounting & Finance, 53 (2): 339-366.

Chevalier, J.A. 1995. Capital Structure and Product Market Competition: Empirical Evidence from Supermarket Industry. The American Economic Review, 85 (3): 415-435.

Chhaochharia, V., Y. Grinstein, G. Grullon et al. 2017. Product Market Competition and Internal Governance: Evidence from the Sarbanes Oxley Act. Management Science, 63 (5): 1405-1424.

Chi, J. and X. Su. 2016. Product Market Threats and the Value of Corporate Cash Holdings. Financial Management, 45 (3): 705-735.

Deng, K. and H. Zeng. 2014. The Financial Constraints in China. Economic Research Journal, (2): 47-60.

Denis, D.J. and V. Sibilkov. 2010. Financial Constraints, Investment, and the Value of Cash Holdings. Review of Financial Studies, 23 (1): 247-269.

Dittmar, A. and J. Mahrt-Smith. 2007. Corporate governance and the value of cash holdings. Journal of Financial Economics, 83 (3): 599-634.

Fama, E.F., K.R. 1998. French. Taxes, Financing Decisions, and Firm Value. Journal of Finance, 53 (3): 819-843.

Fang, H. and Y. Jin. 2013. Corporate Governance, Internal Control and Inefficient Investment: Theoretical Analysis and Empirical Evidences. Accounting Research, (7): 63-69.

Faulkender, M. and R. Wang. 2006. Corporate Financial Policy and the Value of Cash. Journal of Finance, 61 (4): 1957–1990.

Frésard, L. 2010. Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings. The Journal of Finance, 65 (3): 1097-1122.

Frésard, L. and P. Valta. 2013. Competitive Pressure and Corporate Investment: Evidence from Trade Liberalization. Working Paper.

Giroud, X. and H.M. Mueller. 2010. Does Corporate Governance Matter in Competitive Industries? Journal of Financial Economics, 95 (3): 312-331.

Griffiths, R. 2001. Product Market Competition, Efficiency and Agency Costs: An Empirical Analysis. IFS Working Papers, Institute for Fiscal Studies (IFS).

Guadalupe, M. and F. Perez-Gonzalez. 2006. The Impact of Product Market Competition on Private Benefits of Control. Hi-Stat Discussion Paper Series, (4): 561-562.

Harford, J., S. Mansi and W. Maxwell. 2008. Corporate Governance and a Firm’s Cash Holdings. Journal of Financial Economics, 87 (3): 535-555.

Haushalter, D., S. Klasa and W.F. Maxwell. 2007. The Influence of Product Market Dynamics on a Firm's Cash Holdings and Hedging Behavior. Journal of Financial Economics, 84 (3): 797-825.

Jain, B.A., J. Li and Y. Shao. 2013. Governance, Product Market Competition and Cash Management in IPO Firms. Journal of Banking and Finance, 37 (6): 2052-2068.

Jensen, M.C. 1986. Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review, 76 (2): 323-329.

Jiang, F., K.A. Kim, J.R. Nofsinger et al. 2015. Product market competition and corporate investment: Evidence from China. Journal of Corporate Finance, 35: 196-210.

Kovenock, D. and G.M. Phillips. 1997. Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions. Review of Financial Studies, (10): 767-803.

Laksmana, I., Y. Yang. 2016. Product Market Competition and Corporate Investment Decisions. Review of Accounting & Finance, 14 (2): 128-148.

Lin. Y. and Z. Li. 2004. Policy Burden, Moral Hazard and Soft Budget Constraint. Economic Research Journal, (2): 17-27.

Liu, X. and L. Zhang. 2016. Product Market Competition, Accounting Information Quality and Investment Efficiency: Empirical Evidence from 2001-2014 Chinese A-Share Market. Journal of Central University of Finance and Economics, (9): 57-72.

Liu, Y. and D.C. Mauer. 2011. Corporate Cash Holdings and CEO Compensation Incentives. Journal of Financial Economics, 102 (1): 183-198.

Liu, Z. and M. Yu. 2009. Research on Product Market Competition and the Value of Cash Holdings. Inquiry into Economic Issues, (2): 140-145.

Myers, S.C. and N. Majluf. 1984. Corporate Financing and Investment and Decisions When Firms have information that Investor Do Not Have. Journal of Financial Economics, 13 (2): 187-221.

Nikolov, B. and T.M. 2014. Whited. Agency Conflicts and Cash: Estimates from a Dynamic Model. Journal of Finance, 69 (5): 1883–1921.

Pinkowitz, L., R.M. Stulz and R. Williamson. 2006. Does the Contribution of Corporate Cash Holdings and Dividends to Firm Value Depend on Governance? A Cross-country Analysis. Journal of Finance, 61 (6): 2725–2751.

Sun, J., N. Gu and B. Liu. 2012. Product Market Competition and the Value of Cash Holdings: Predation Theory or Agency Theory. Research on Economics and Management, (2): 49-57.

Tesler, L.G. 1966. Cutthroat Competition and the Long Purse. Journal of Law and Economics, 9 (9): 259-277.

Xing, L. and H. Chen. 2013. Product Market Competition, Competitive Position and Audit Fees: Double Considerations Based on Agency Costs and Business Risks. Auditing Research, (3): 50-58

Yang, X. and X. Yin. 2015. Industry Concentration, Competitive Position and Competitive Effect of Cash Holdings. Economic Science, (6): 78-91.

Yang, X. and Z. Zhang. 2008. Institution Background, Ownership Property and the Value of Corporate Cash Holdings. Economic Research Journal, (12): 111-123.

Yang, X., L. Zhang and H. Wu. 2014. Marketization, Managerial Power and Firm Cash Holdings. Nankai Business Review, 17 (2): 34-45.

Yang, X. and J. Zheng. 2017. The Impact of Predation Risk on the Marginal Value of Cash Holdings: An Empirical Perspective. Journal of Financial Risk Management, (6): 150-162.

Zeng, A., C. Zhang. and Z. 2013. Wei. Financial Crisis Shock, Financial Flexibility and Corporate Investment Behavior: Empirical Evidence from Chinese Listed Companies. Management World, (4): 107-120.

Zhang, H. and Z. Lu. 2012. An Analysis of the Effect of the Explorative and Exploitative Innovations and their Balance. Management World, (3): 141-150.

Zhong, T. and Y. Fan. 2004. Product Market Competition and Financial Leverage Decision. Accounting Research, (6): 73-77.


Refbacks

  • There are currently no refbacks.


Copyright 2019 Caribbean Journal of Science. All rights reserved.