The Research On The Effect Of Investment Behavior Under Product Market Competition And Cash Holding

Cash is the most liquid asset in corporate which greatly impacts on management,investment and fund-raising of the enterprise. As an external business environmentalfactor, product market competition will not only affect the level of cash holding, butalso affect the company's investment decisions. Based on industrial organization theory,pecking order theory and agency theory, combining research methods and conclusionsof former literatures, this paper investigates the impact of product market competitionon cash holdings and investment, hoping to get much more empirical evidence foranalyzing investment behaviors of China's listed companies.This paper takes A-share listed companies of manufacturing sector as initialsample and selects10-year panel data of2001-2010for research, and takes productmarket competition as environment variable to empirically test the impact of productmarket competition on cash holdings. The results show that company cash holdingsmay be very different in different industries. The more intense competition of theproduct market, the more cash will be hold by business for preventive motivation todeal with competitor predatory behavior. In addition, the paper discusses the impact ofproduct market competition and cash holdings on business investment, and builds amodel of the relationship of product market competition, corporate cash holdings andinvestment. In the low competition group, the sensitivity coefficient of cash oninvestment is more than in the high competition group. This shows that in the lowproduct market competition, cash holdings have greater impact on investmentbehavior.Finally, the paper studies the impact of excess cash on over-investment underdifferent competitive environments. We divide group samples into high-competitionsand low-competitions, and find that the sensitivity coefficient of excess cash onover-investment in the low competition group is significantly positive, in the highlycompetitive group is also positive but not significant. This shows that in highcompetition product market, investment behavior of enterprises are relatively cautious,but in less competition product market industry, corporations are more prone toover-investment behavior.