Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings

55 Pages Posted: 3 Mar 2008 Last revised: 31 Aug 2009

See all articles by Laurent Frésard

Laurent Frésard

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute

Date Written: April 1, 2009

Abstract

This paper shows that corporate cash holdings is a key driver of product market performance. In particular, I provide evidence that larger relative-to-rivals cash reserves lead to systematic future market-share gains at the expense of industry rivals. Importantly, this “competitive” effect of cash turns out to be magnified when rivals face tighter financing constraints and when the amount of strategic interactions between competitors is substantial. Overall, the results suggest that corporate cash policy comprises a substantial strategic dimension.

Keywords: Cash Holdings, Corporate Liquidity, Product Market Competition

JEL Classification: G31, G32, D21

Suggested Citation

Frésard, Laurent, Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings (April 1, 2009). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1090156 or http://dx.doi.org/10.2139/ssrn.1090156

Laurent Frésard (Contact Author)

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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