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Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings
Author(s) -
FRESARD LAURENT
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01562.x
Subject(s) - cash , product market , competitor analysis , business , competition (biology) , debt , product (mathematics) , cash management , market share , monetary economics , finance , economics , microeconomics , marketing , ecology , geometry , mathematics , biology , incentive
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.