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Product market competition and the value of corporate cash: Evidence from trade liberalization

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  • Alimov, Azizjon

Abstract

This paper uses the 1989 Canada–U.S. Free Trade Agreement as a source of exogenous variation in product markets to establish the impact of increased competition on the market valuation of corporate cash reserves. I find that the trade liberalization leads to a significant increase in the value of cash for firms experiencing a larger shock to their competitive environment. The impact of the trade liberalization is stronger among firms that face greater risk of losing investment opportunities to rivals. I also show that these inferences about the valuation effect of competition apply more broadly to a large sample of firms.

Suggested Citation

  • Alimov, Azizjon, 2014. "Product market competition and the value of corporate cash: Evidence from trade liberalization," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 122-139.
    • Handle: RePEc:eee:corfin:v:25:y:2014:i:c:p:122-139
    DOI: 10.1016/j.jcorpfin.2013.11.011
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    More about this item

    Keywords

    Competition; Trade liberalization; Cash holdings; Firm value;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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