Product Market Threats and the Value of Corporate Cash Holdings
Document Type
Article
Publication Date
1-1-2016
Publication Title
Financial Management
Volume
45
Issue
3
First page number:
705
Last page number:
735
Abstract
We construct a model to show that predatory strategies by a financially strong rival can cause a financially weak firm to underinvest. This threat intensifies when the two firms produce similar products and share similar future investment opportunities. We show that cash holdings become more valuable by providing liquidity to fund investment opportunities as they emerge, thereby mitigating the underinvestment problem. Empirical evidence supports these model predictions. The value of cash is significantly higher for firms facing higher predatory threats. The results are robust to various controls for financial constraints, corporate governance, risk factors, and industry-level measures of product market competition. An identification strategy that exploits exogenous variation in financial constraints further corroborates the causal effect of predatory threats on the value of cash. © 2015 Financial Management Association International
Language
English
Repository Citation
Chi, J.,
Su, X.
(2016).
Product Market Threats and the Value of Corporate Cash Holdings.
Financial Management, 45(3),
705-735.
http://dx.doi.org/10.1111/fima.12119
