Competitive Pressure and Corporate Policies
61 Pages Posted: 14 Oct 2011 Last revised: 17 Mar 2017
Date Written: February 24, 2012
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: Suggested Citation