Publication

Cash Holdings and Competition

2013
Working Papers

Abstract

We use a dynamic cash management model in which firms face competitive pressure to show that product market competition increases the cash holdings as well as the size and frequency of equity issues of financially constrained firms. We test these predictions on Compustat firms for the period 1980-2007 and show that product market competition has first order effects on the cash management and financing decisions of constrained firms, in ways consistent with our theory. Also consistent with the model, we find that unconstrained firms' cash holdings and financing decisions are not systematically related to product market competition. Finally, we show that the time trend in cash holdings documented by Bates, Kahle and Stulz (2009) can be at least partly attributed to a competition effect.

Official source

https://infoscience.epfl.ch/entities/publication/bfb86dec-cbf8-4da6-831b-a54ebb46d6ad

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2013
Working Papers

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/bfb86dec-cbf8-4da6-831b-a54ebb46d6ad

About this result

Related concepts (32)

Perfect competition

In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In theoretical models where conditions of perfect competition hold, it has been demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium would be a Pareto optimum.

Competition (economics)

In economics, competition is a scenario where different economic firms are in contention to obtain goods that are limited by varying the elements of the marketing mix: price, product, promotion and place. In classical economic thought, competition causes commercial firms to develop new products, services and technologies, which would give consumers greater selection and better products. The greater the selection of a good is in the market, the lower prices for the products typically are, compared to what the price would be if there was no competition (monopoly) or little competition (oligopoly).

Monopolistic competition

Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a company takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other companies. If this happens in the presence of a coercive government, monopolistic competition will fall into government-granted monopoly.

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Cash Holdings and Competition

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