Competition, Cash Holdings, and Financing Decisions

59 Pages Posted: 20 Mar 2009 Last revised: 6 Feb 2014

See all articles by Erwan Morellec

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Boris Nikolov

University of Lausanne; Swiss Finance Institute

Francesca Zucchi

Federal Reserve Board

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

Morellec, Erwan and Nikolov, Boris and Zucchi, Francesca, Competition, Cash Holdings, and Financing Decisions. Swiss Finance Institute Research Paper No. 13-72. Available at SSRN: https://ssrn.com/abstract=1364009 or http://dx.doi.org/10.2139/ssrn.1364009

Erwan Morellec

Ecole Polytechnique Fédérale de Lausanne ( email )

College of Management
Extranef Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/

Swiss Finance Institute

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

Boris Nikolov (Contact Author)

University of Lausanne ( email )

Lausanne, CH-1015
Switzerland

Swiss Finance Institute ( email )

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

Francesca Zucchi

Federal Reserve Board ( email )

20th and C Street NW
Washington, DC 20551
United States

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