Competition, Cash Holdings, and Financing Decisions
59 Pages Posted: 20 Mar 2009 Last revised: 6 Feb 2014
Abstract
We use a dynamic model of cash management in which firms face competitive pressure to show that competition increases corporate cash holdings as well as the frequency and size of equity issues. In our model, these effects are driven by small, financially constrained firms, in contrast with the theories based on strategic interactions in which large leaders or incumbents value more cash. We test these predictions on Compustat firms for the period 1980-2007 and show that product market competition has first order effects on the cash holdings and financing decisions of constrained firms, in ways consistent with our theory.
Keywords: product market competition, cash holdings, financing decisions
JEL Classification: G13, G14, G31, G34
Suggested Citation: Suggested Citation
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