Reaearch On The Effect Of Firms' Financing Constraints On Their Product Market Price Competition

Firms are generally faced with financing constraints because of the imperfection in capital market. A firm's financing constraints will restrict its production and operation activities. Inevitably, they will influence a firm's behaviors and performance in product market competition. However, what impact will financing constraints exert on corporate competitive performance in product market and how it happens has not been sufficiently studied. This paper focuses on how a firm's financing constraints act on its product pricing behavior and then affect its competitive performance in market competition of similar products, namely what effect do corporate financing constraints have on product market price competition.This paper first builds an extended game model to deduce how financing constraints negatively affect corporate competitive performance through the intermediate channel of product pricing in similar product market, and then provides empirical evidences through empirical analysis based on the panel data of Chinese A-share listed manufacturing firms over the period 1998-2013. Besides, we explore the differential effect of financing constraints on product market price competition across distinct stages of business cycle fluctuations. The results illustrate that the influence of financing constraints on firms' competitive performance is more pronounced in economic contraction than in economic expansion, and so is the mediating effect of product pricing. In addition, this article compares the differences in effectiveness of financing constraints across industries with two different competitive characteristics, which are market concentration and operation similarity. The results show that the negative effect of financing constraints on competitive performance is stronger in industries with high market concentration and high operation similarity. The intermediate effect of product pricing is also different across industries. In industries with high market concentration and low operation similarity, firms faced with high financing constraints are more likely to improve their product pricing, as their increase in price will not induce a significant negative impact on their competitive performance. That is to say, the intermediary effect of product price is relatively limited.This paper deeply discusses the effect of financing constraints on corporate price competition in product market, and then compares the effect under different macroeconomic environment and industry competitive characteristics. It not only expands and enriches the research achievements concerning financing constraints and product market competition, but also provides certain theoretical basis and practical guidance for the financing and product pricing decisions of Chinese manufacturing listed companies.