The Influence of Product Market Dynamics on the Firm's Cash Holdings and Hedging Behavior

47 Pages Posted: 10 Mar 2005  

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration

Sandy Klasa

University of Arizona - Department of Finance

William F. Maxwell

SMU - Cox School

Abstract

Prior work suggests that if a firm shares a larger proportion of its growth opportunities with rivals, an inability to fully invest in these opportunities leads to predatory behavior on the part of rivals and losses in market share. We examine whether firms manage this predation risk. We find inter- and intra-industry evidence that the extent of the interdependence of a firm's investment opportunities with rivals is positively associated with its use of derivatives and the size of its cash holdings. Moreover, an analysis of investment behavior provides evidence that if this interdependence is high, the management of predation risk provides strategic benefits. Our results indicate that predation risk is an important determinant of corporate financial policy choices and investment behavior.

Keywords: Cash holdings, hedging, financing constraints, risk management, intra-industry equilibrium

JEL Classification: G31, G32

Suggested Citation

Haushalter, David and Klasa, Sandy and Maxwell, William F., The Influence of Product Market Dynamics on the Firm's Cash Holdings and Hedging Behavior. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=678512

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration ( email )

University Park, PA 16802
United States
814-863-7969 (Phone)
814-865-3362 (Fax)

Sandy Klasa (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

William F. Maxwell

SMU - Cox School ( email )

Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States

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