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The Impact of Capital Market Imperfections on the Relationship between Competition and Corporate Performance

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  • Schoubben, Frederiek
  • Van Hulle, Cynthia
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    Abstract

    This paper explores the relationship between product market competition and firm performance under different levels of information-related capital market imperfections. We show empirically, on a sample of listed as well as unlisted firms, that for companies suffering from financing constraints, increasing competition leads to a decrease in both productivity and profitability while the opposite holds for non (less) constrained firms. This result is robust to alternative measures of competition and can be explained by differences in access to external financing and its impact on investment behavior. Combining the logic of option theory with the literature on competition, we argue that the value of postponing investment is influenced by both the intensity and the type of competitive interaction. Intense and aggressive competition pressures firms to exercise investment options early. For firms with limited access to external financing this pressure to invest exacerbates financing constraints, forcing them to leave valuable investment options unexercised. Overall, our results suggest that competition is not necessarily beneficial for firm performance and that the positive relation that is usually found in the recent governance literature, can be due to restricting the sample to listed firms, i.e., companies that suffer least from capital market imperfections.

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    Bibliographic Info

    Paper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/274823.

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    Date of creation: Jan 2009
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    Handle: RePEc:ner:leuven:urn:hdl:123456789/274823

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    Web page: http://www.kuleuven.be

    Related research

    Keywords: Firm performance; Financing constraints; Product market competition; Stock listening; Productivity; Profitability;

    References

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    1. Bianco, Magda & Nicodano, Giovanna, 2006. "Pyramidal groups and debt," European Economic Review, Elsevier, vol. 50(4), pages 937-961, May.
    2. Stijn Claessens & Konstantinos Tzioumis, 2006. "Ownership and Financing Structures of Listed and Large Non-listed Corporations," Corporate Governance: An International Review, Wiley Blackwell, vol. 14(4), pages 266-276, 07.
    3. Konings, Jozef & Rizov, Marian & Vandenbussche, Hylke, 2003. "Investment and financial constraints in transition economies: micro evidence from Poland, the Czech Republic, Bulgaria and Romania," Economics Letters, Elsevier, vol. 78(2), pages 253-258, February.
    4. Vivek Ghosal & Prakash Loungani, 1995. "Product market competition and the impact of price uncertainty on investment: some evidence from U.S. manufacturing industries," International Finance Discussion Papers 517, Board of Governors of the Federal Reserve System (U.S.).
    5. Nico Dewaelheyns & Cynthia Van Hulle, 2006. "Corporate Failure Prediction Modeling: Distorted by Business Groups' Internal Capital Markets?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 909-931.
    6. Povel, Paul & Raith, Michael, 2004. "Financial constraints and product market competition: ex ante vs. ex post incentives," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 917-949, September.
    7. Glenn W. Boyle & Graeme A. Guthrie, 2003. "Investment, Uncertainty, and Liquidity," Journal of Finance, American Finance Association, vol. 58(5), pages 2143-2166, October.
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    Cited by:
    1. Chrysovalantou Milliou & Emmanuel Petrakis, 2009. "Timing of Technology Adoption and Product Market Competition," CESifo Working Paper Series 2686, CESifo Group Munich.

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