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Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings

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  • LAURENT FRESARD
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    Abstract

    This paper shows that large cash reserves lead to systematic future market share gains at the expense of industry rivals. Using shifts in import tariffs to identify exogenous intensification of competition, difference-in-difference estimations support the "causal" impact of cash on product market performance. Moreover, the analysis reveals that the "competitive" effect of cash is markedly distinct from the strategic effect of debt on product market outcomes. This effect is stronger when rivals face tighter financing constraints and when the number of interactions between competitors is large. Overall, the results suggest that cash policy encompasses a substantial strategic dimension. Copyright (c) 2010 The American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 65 (2010)
    Issue (Month): 3 (06)
    Pages: 1097-1122

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    Handle: RePEc:bla:jfinan:v:65:y:2010:i:3:p:1097-1122

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    Cited by:
    1. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2013. "Corporate Liquidity Management: A Conceptual Framework and Survey," NBER Working Papers 19502, National Bureau of Economic Research, Inc.
    2. Huang, Hsing-Hua & Lee, Han-Hsing, 2013. "Product market competition and credit risk," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 324-340.
    3. Jain, Bharat A. & Li, Joanne & Shao, Yingying, 2013. "Governance, product market competition and cash management in IPO firms," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2052-2068.
    4. Kjenstad, Einar & Su, Xunhua, 2012. "Product Market Predatory Threats and the Use of Performance-sensitive Debt," MPRA Paper 44114, University Library of Munich, Germany.
    5. Xu, Jin, 2012. "Profitability and capital structure: Evidence from import penetration," Journal of Financial Economics, Elsevier, vol. 106(2), pages 427-446.
    6. Mitani, Hidetaka, 2014. "Capital structure and competitive position in product market," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 358-371.
    7. Larkin, Yelena, 2013. "Brand perception, cash flow stability, and financial policy," Journal of Financial Economics, Elsevier, vol. 110(1), pages 232-253.
    8. Paul Ehling & David Haushalter, 2014. "When does cash matter? Evidence for private firms," Banco de Espa�a Working Papers 1412, Banco de Espa�a.
    9. Makaew, Tanakorn & Maksimovic, Vojislav, 2013. "Industry Shocks, Operating Risk, and Corporate Financial Policies around the World," MPRA Paper 53366, University Library of Munich, Germany.

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