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

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