Product Market Threats and the Value of Corporate Cash Holdings

Financial Management, Vol. 45, No. 3, pp. 705-735, Fall 2016

46 Pages Posted: 16 Feb 2013 Last revised: 8 Sep 2016

See all articles by J. Daniel Chi

J. Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance

Xunhua Su

Norwegian School of Economics (NHH)

Date Written: September 26, 2015

Abstract

We construct a model to show that predatory strategies by a financially strong rival can cause a financially weak firm to underinvest. This threat intensifies when the two firms produce similar products and share similar future investment opportunities. We show that cash holdings become more valuable by providing liquidity to fund investment opportunities as they emerge, thereby mitigating the underinvestment problem. Empirical evidence supports these model predictions. The value of cash is significantly higher for firms facing higher predatory threats. The results are robust to various controls for financial constraints, corporate governance, risk factors, and industry-level measures of product market competition. An identification strategy that exploits exogenous variation in financial constraints further corroborates the causal effect of predatory threats on the value of cash.

Keywords: predation, competition, value, cash holdings, product similarity, financial constraints

JEL Classification: G31, G32, L10, L21

Suggested Citation

Chi, Jianxin Daniel and Su, Xunhua, Product Market Threats and the Value of Corporate Cash Holdings (September 26, 2015). Financial Management, Vol. 45, No. 3, pp. 705-735, Fall 2016. Available at SSRN: https://ssrn.com/abstract=2218413 or http://dx.doi.org/10.2139/ssrn.2218413

Jianxin Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

HOME PAGE: http://www.unlv.edu/people/jianxin-chi

Xunhua Su (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://sites.google.com/site/xunhuasu/research

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