Product Market Competition And The Value Of Corporate Cash

Companies hold more cash is increasingly becoming the focus of academic research.In recent years,scholars expand corporate cash holding research form the traditional financial theory to product market competition theory of the industrial organization.As an external mechanism,product market competition affects the value of corporate cash.One the one hand,product market competition theory argues that corporate cash holdings can grasp the investment opportunities to deal with the predation risk form product market competition.One the other hand,product market competition can improve the use efficiency of cash through liquidation threats and external supervision to reduce agency costs.Based on cash holding theory and product market competition theory,this paper studies the relationship between product market competition and the value of corporate cash,exploring the different mechanisms through which changes in competition environment impact valuation.To do so,we turn to theories of predation threats or agency conflicts for the insight into the links between product market competition and the value of corporate cash.Financing constraints are the general dilemma for Chinese companies,the level of the financing constraints,not only restricts the company's investment level,but also affects the company's agency costs.Therefore,financing constraints is a good group index to distinguish the predatory effect and governance effect of product market competition on the value of corporate cash.Since the value of companies' cash reserves is ultimately determined by how the market expects that cash to be used,we further study the use of cash holdings in product market competition.This paper selects 2007-2016 China A shares of quoted companies with a total of 19643 observations to establish panel data,empirical study the impact of product market competition on the value of corporate cash.The results are as follows:(1)Product market competition is positively related to the value of corporate cash;(2)Product market competition improves the value of corporate cash through predatory effect rather than governance effect;(3)For financing constrained companies,predatory effect is significant,product market competition can improve the value of corporate cash,but for unconstrained companies,governance effect is not significant;(4)Product market competition can increase the use of cash in investment and improve the use efficiency of cash.This paper enrich the related research of the value of corporate cash,providing policy recommendations for companies to make cash holding decisions under different financing constraints and product market competition,and it contributes companies to thinking highly of strategic value of cash holding.