Product Market Competition and Corporate Cash Holdings: A Cross-Country Evidence
61 Pages Posted: 29 Oct 2019
Date Written: October 25, 2019
From a mixed sample of developed and emerging economies, this study documents a positive relationship between product market competition and corporate cash holdings, using a new composite measure of competition that complements existing proxies in two ways: it is likely the first to captures all three horizontal dimensions of product pricing power, and, the accounting data-based construction facilitates the computation of competition for non-U.S. firms.
The positive association between competition and liquidity is influenced by various firm- and country-level factors. Specifically, competition-driven cash stockpile is lower when the firms are more dependent on external financing, more financially constrained, or located in countries with stronger investor protection. Across countries, this cash hoarding behavior is strengthened in developed equity markets but weakened in developed credit markets. Overall, the role of product market competition as a global driver of corporate cash holdings is statistically positive and economically significant after many robustness checks.
Suggested Citation: Suggested Citation