Product Market Competition, Corporate Investment and Financing: Evidence from Cash Flow Shortfall
52 Pages Posted: 15 Jan 2013
Date Written: January 14, 2013
We investigate how product market competition jointly affects specific corporate investment and financing behavior. Given an expected cash flow shortfall, firms may reduce cash reserves, increase external finance, cut back dividends, and sell off assets and/or investments. The first three actions are financing decisions while the last two are investment decisions. The relative frequency and size of each of these actions is examined and cross-sectional differences in terms of product market competition are analyzed. The evidence shows that product market competition does affect both investment and financing decisions as it affects the size of some but not all of these actions. In particular, greater product market competition leads to lower cash reserves and higher external finance regardless of the types of market structure, whereas its effect on asset divestiture, dividend payout, and investment seems to be market-structure specific.
Keywords: product market competition, investment, financing, cash flow shortfall
JEL Classification: G15, G34, G31, L13
Suggested Citation: Suggested Citation