Product Market Competition, Corporate Governance And Cash Holdings

The decision making of corporate cash holdings is an important financing behavior in corporate finance and management strategy, which play a significant role in corporate investing and financing behavior, dividend distribution and daily operation. With the development of research in imperfect of capital market, earning management and excess cash holdings have gradually drawn extensive attention in corporate finance studies. Especially corporate has held more excess cash reserves all through the world nowadays, which improves the theoretical and empirical research in corporate cash holdings. Several theories about cash holdings have been researched in corporate finance, such as precautionary motive theory, transaction motive theory, static trade-off theory, pecking order theory and free cash flow theory. Correspondingly, research scope in corporate cash holdings has turned to corporate governance from basic financial factors in early studies. And researchers nowadays focus more on agency cost motive rather than pure financing motive.Product market competition is an important corporate governance mechanism. And scientists generally believe that product market competition could mitigate the potential agency problems and improve production efficiency. However, existing literatures have seldom discussed corporate cash holdings based on agency cost motive from product market competition. Consequently, studies on corporate cash holdings in combination with product market competition not only help us do comprehensive research of cash reserves based on the exterior background and internal characteristics of institutional environment, but also give us all-round attitudes about the original root and intrinsic value of corporate cash holdings. Stand on this perspective of research, it may provide good safeguarding and references for making scientific strategic management and financial decisions.Based on industrial organization, corporate finance and corporate governance theory, this paper makes an empirical investigation of balanced panel data of 592 listed firms in China using fixed effect model and generalized least square method, and discusses the influence mechanism of product market competition and corporate governance on the corporate cash holdings from different aspects of governance, such as ownership concentration, board of directors, managerial incentives and CEO turnover. On the basis of the studies above, we further analyze how does corporate governance have moderating effects on the relationship between product market competition and corporate cash holdings combined with different ownership structures.The results show that self-interested managers do choose to hold too much cash reserves in Chinese listed firms. We find that when firms face less market competition in industry, they have significantly higher cash reserves than firms facing intense market competition. It could be the case that managers can hoard cash for their own benefit when they face less market competition in industry. However, if the firms have strong governance, corporate governance mechanisms can help to mitigate the potential agency problems associated with this so large cash reserves in less market competition. To be specific, we provide evidence on the following four main aspects: First, when product market competition decreases, firms with higher ownership concentration have lower cash reserves. It could be the case that strong governance can mitigate managers' large cash holdings activities based on their own profit in firms facing less market competition in industry. Second, when firms have higher proportion of directors holding share and non-duality leadership, managers may choose to lower cash reserves in less intensive product market competition; the relationship between product market competition, independent directors and corporate cash holdings is not significant in 592 Chinese listed firms, which may derive from the different action effects the independent directors have in stated-owned listed companies and private listed companies; chairman turnover shows a cash spending activity on the benefit of chairman who left. That is to say, when chairman turnover occurs, cash holdings are decreased in the firms in low level of competition in industry. Third, when CEO holds more share proportion and managers have equity compensation, firms would decrease cash reserves in less intensive product market competition. However, managerial monetary compensation can not mitigate managers' large cash holdings activities based on their own profit in firms facing less market competition in industry. Fourth, when CEO turnover occurs, the successor would not choose to hold large sums of cash when the firms face less market competition in industry in order to transfer good news to capital market. However, when we study the lag effect of CEO turnover on the relationship between product market competition and cash holdings, we find that on one year after CEO turnover, firms facing low level of market competition do not reduce large cash holdings. This indicates that CEO turnover does not resolve agency problems in the next years. Further more, it is noteworthy that the relationship between product market competition, corporate governance and corporate cash holdings is not the same in different ownership structures. So we should make scientific financial decisions considering certain ownership structures.Overall, based on product market competition, our study gives a comprehensive research of the influence mechanism of corporate governance on the corporate cash holdings from different aspects of governance, such as ownership concentration, board of directors, managerial incentives and CEO turnover. This multi-perspective research not only discusses comprehensively the relationship between corporate governance and cash holdings, but also reveals the intervention effect of agency cost motive on the corporate cash holdings in different conditions of product market competition. However, stand on innovation research, there are not sufficient related literatures to support our results. Consequently, this paper has some limitations. For example, there may be an endogenous feedback form cash holdings to governance because cash holding and governance are jointly determined. And dynamic relationship between managerial incentives and corporate cash holdings is not included in our study. And the proxy variables for product market competition need to be improved. In view of the fact that it is difficult to find an accurate and available proxy variable to measure the product market competition, we hope we could find a more precise variable to gain a more scientific result in the future studies.