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Product market competition and the value of corporate cash: An agency theory explanation
Ist Teil von
International review of financial analysis, 2022-11, Vol.84, p.102422, Article 102422
Ort / Verlag
Elsevier Inc
Erscheinungsjahr
2022
Quelle
Alma/SFX Local Collection
Beschreibungen/Notizen
In this paper, we document the effect of product market competition on cash value and provide evidence supporting the agency discount mechanism. Using the regulation-induced IPO suspensions in China as shocks to product market competition, we find that reduced competition threat, induced by competitors' IPO delay, decreases incumbent firms' value of cash reserve. The effect of IPO suspension on cash holding is more pronounced for companies with severe agency problems and loose governance mechanisms but not statistically different across high and low predation threats. Furthermore, we show that the marginal value of cash increases when IPO restarts, and our baseline results hold in both a large sample and a matched sample of firms. Our paper contributes to the literature by providing the plausibly causal effect of product market competition on cash value and an explanation from the perspective of competition's disciplinary role in mitigating managers' slack.
•In this paper, we document the effect of product market competition on cash value and provide evidence supporting the agency discount mechanism.•Using the regulation-induced IPO suspensions in China as shocks to product market competition, we find that reduced competition threat, induced by competitors' IPO delay, decreases incumbent firms' value of cash reserve.•The effect of IPO suspension on cash holding is more pronounced for companies with severe agency problems and loose governance mechanisms but not statistically different across high and low predation threats.