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Competitive Pressure and Corporate Policies

61 Pages Posted: 14 Oct 2011 Last revised: 17 Mar 2017

Philip Valta

University of Bern; University of Geneva; Swiss Finance Institute

Laurent Frésard

University of Maryland - Robert H. Smith School of Business

Date Written: February 24, 2012

Abstract

This paper examines the impact of increased product market competition on corporate investment and financing decisions. Using reductions in import tariff rates as a source of variation in competitive pressure, we find that firms simultaneously reduce capital and R&D investment, increase cash reserves and equity, and decrease debt in response to intensified product market competition. These adjustments are especially strong among industry followers, non-diversified and non-exporting firms, and in more competitive markets. Also, the impact of competition turns out to be magnified when firms are exposed to greater financing risk. Overall, the results highlight that competitive pressures play a considerable role in driving the allocation of resources within firms.

Keywords: Product market competition, financing policies, corporate investment, cash holdings, tariff reduction

JEL Classification: G15, G34, G31

Suggested Citation

Valta, Philip and Frésard, Laurent, Competitive Pressure and Corporate Policies (February 24, 2012). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1944121 or http://dx.doi.org/10.2139/ssrn.1944121

Philip Valta (Contact Author)

University of Bern ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

University of Geneva ( email )

Bd. du Pont d'Arve 40
Geneva, 1211
Switzerland

Swiss Finance Institute ( email )

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

Laurent Frésard

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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