Product market competition and the value of corporate cash: An agency theory explanation |
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| Institution: | 1. Business School, Zhengzhou University of Aeronautics, China;2. School of Accounting, Guangdong University of Finance, China;3. Center for Accounting, Finance and Institutions, School of Business, Sun Yat-sen University, China;4. School of Management, Xiamen University, China;1. School of Economics, Beijing International Studies University, Beijing, China;2. School of Finance, Capital University of Economics and Business, Beijing, China;3. School of Finance, Central University of Finance and Economics, Beijing, China;1. School of Accountancy, Southwestern University of Finance and Economics, 555 Liutai Road, Chengdu, China;3. Institute of Accounting and Finance, Shanghai University of Finance and Economics, 111 Wuchuan Road, Shanghai, China;1. School of International Economics, China Foreign Affairs University, 24 Zhanlan Road, Xicheng District, Beijing 100037, China;2. School of Accounting, Guangdong University of Foreign Studies;3. Research Center for Accounting and Economic Development of Guangdong-Hong Kong-Macao Greater Bay Area, Guangdong University of Foreign Studies, 2 Baiyun Avenue, Baiyun District, Guangzhou 510420, China;1. School of Economics and Management, North China Electric Power University, Beijing, China;2. School of Economics, Beijing Technology and Business University, Beijing, China |
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| Abstract: | 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. |
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