Product Market Competition, Corporate Investment and Financing: Evidence from Cash Flow Shortfall

2013 ◽  
Author(s):  
Adrian (Wai-kong) Cheung
Keyword(s):  
Cash Flow ◽  
Market Competition ◽  
Product Market ◽  
Corporate Investment ◽  
Product Market Competition ◽  
Investment And Financing

Product market competition, cash flow and corporate investments

2018 ◽  
Vol 44 (2) ◽  
pp. 207-221 ◽  
Author(s):  
Hussein Ali Ahmad Abdoh ◽  
Oscar Varela
Keyword(s):  
Cash Flow ◽  
Market Competition ◽  
Product Market ◽  
Product Market Competition ◽  
Content Type ◽  
Growth Firms ◽  
Capital Spending ◽  
The Difference ◽  
The Impact

Purpose The purpose of this paper is to examine the effects of product market competition on capital spending (investments) financed by cash flow (CF), and the role of financial constraints (FC) on these effects. Design/methodology/approach The Herfindahl-Hirschman index of concentration measures competition. Earnings retention, working capital, the Kaplan and Zingales (1997) index and CF shortfalls measure FC. Regressions relating capital spending to competition are performed for the full sample, as well as financially constrained and unconstrained, and growth and value firms’ sub-samples. For robustness, large reductions in import tariffs are examined to exogenously measure competition, with the impact of these on capital spending tested via the difference-in-difference method. Findings The results show that competition fosters valuable investments when firms are financially unconstrained, especially for growth firms, and reduces these investments when they are financially constrained, especially for value firms. Practical implications The role of policy makers in alleviating FC should be focused toward growth firms that operate in competitive industries. As well, increasing financial pressure on value firms in competitive industries can have desirable effects, as it forces these firms to reduce investment inefficiency. Originality/value Many firm-specific and environmental factors drive the relation between competition and investment. Khanna and Tice (2000) find profitable firms increasing and highly levered firms decreasing investments in response to Wal-Mart’s entry into their markets. Jiang et al. (2015) suggest that environments with predictable growth drive a positive relation between competition and investments. This study claims that another factor that affects this relation is the firm’s level of FC.

Product market competition, oil uncertainty and corporate investment

2020 ◽  
Vol 16 (5) ◽  
pp. 645-671
Author(s):  
Hussein Abdoh ◽  
Aktham Maghyereh
Keyword(s):  
Market Competition ◽  
Product Market ◽  
Corporate Investment ◽  
Oil Price ◽  
Product Market Competition ◽  
Price Uncertainty ◽  
Irreversible Investment ◽  
Content Type ◽  
Short Period ◽  
Lagged Dependent Variable

PurposeThe purpose of this study is to examine the effect of product market competition on the oil uncertainty–investment relation.Design/methodology/approachThe authors use firm-level financial data from the COMPUSTAT database, competition proxies from Hoberg and Phillips (2016) and macroeconomic data on crude oil price uncertainty. Corporate investment is measured as capital expenditure scaled by total assets or as the annual change in (net) total fixed assets plus depreciation. Since our panel data covers a short period (22 years) and the regressions include a combination of a lagged dependent variable and firm fixed effects, the authors apply Blundell and Bond’s (1998) GMM system when regressing corporate investment on the interaction between oil uncertainty and competition.FindingsConsistent with the theories in the irreversible investment literature, the authors first show that investments are negatively related to oil uncertainty. Second, they show that firms in competitive industries decrease their investments in response to heightened uncertainty by a higher degree than firms in concentrated industries, suggesting that competition can exacerbate negative investment outcomes when success is uncertain. The authors also examine how competition relates to investment asymmetric reactions to positive and negative oil price return volatilities and find a stronger negative relationships between competition and investment-positive oil price volatility, indicating that increasing the probability of a negative outcome due to uncertainty leads firms to reduce investment to a larger extent.Practical implicationsThe findings provide useful insights to guide corporate investment decisions under oil price change uncertainty. In particular, if firms can wait for the resolution of uncertainty before deciding to pursue irreversible investment in a competitive market, they can avoid potentially large losses by foregoing investment when the outcomes are unfavorable. This is because competition brings a greater uncertainty to firm performance if the investment outcome is poor, as firms in competitive industries share a large proportion of industry-wide profits with rivals and, thus, competition could erode profit margins and increases the likelihood of being driven out of the market. Hence, firms in competitive markets should balance between strategic preemptive motives and waiting for the resolution of uncertainty before deciding to pursue investment.Originality/valueThis study is the first to examine the effect of competition on the relationship between investment and oil price uncertainty. Moreover, it is the first to examine the effect of competition on the asymmetric response of investment to oil price uncertainty emanating from positive and negative changes in oil price.

The effect of managerial ability on product market competition and corporate investment decisions

2020 ◽  
Vol 11 (1) ◽  
pp. 49-69 ◽  
Author(s):  
Mahdi Salehi ◽  
Ali Daemi ◽  
Farzana Akbari
Keyword(s):  
Risk Taking ◽  
Market Competition ◽  
Investment Decisions ◽  
Product Market ◽  
Corporate Investment ◽  
Free Cash Flow ◽  
Product Market Competition ◽  
Investment Efficiency ◽  
Managerial Ability ◽  
Content Type

Purpose This study aims to examine the effect of managerial ability on product market competition and corporate investment decisions, specifically, on risk-taking and investment efficiency. Design/methodology/approach The primary measure of managerial ability is Demerjian et al. model. In this study, Herfindahl–Hirschman Index is used to measure product market competition. Regression analysis is used to examine the association between corporate risk-taking and over-investment of free cash flow and product market competition and managerial ability. Findings Using firm-year observations from 2011 to 2015, the paper findings suggest that competition discourages managers to invest in risky investment. The study also found that managerial ability has no effect on the association between product market competition and investment decision. Originality/value The current study almost is the first study which is conducted on this subject; the results may give strength to further studies.

Product market competition and corporate investment: Evidence from China

2015 ◽  
Vol 35 ◽  
pp. 196-210 ◽  
Author(s):  
Fuxiu Jiang ◽  
Kenneth A. Kim ◽  
John R. Nofsinger ◽  
Bing Zhu
Keyword(s):  
Market Competition ◽  
Product Market ◽  
Corporate Investment ◽  
Product Market Competition

Product market competition and corporate investment decisions

2015 ◽  
Vol 14 (2) ◽  
pp. 128-148 ◽  
Author(s):  
Indrarini Laksmana ◽  
Ya-wen Yang
Keyword(s):  
Risk Taking ◽  
Market Competition ◽  
Investment Decisions ◽  
Product Market ◽  
Corporate Investment ◽  
Product Market Competition ◽  
Term Survival ◽  
Content Type ◽  
Risky Investment

Purpose – The study aims to examine the association between product market competition and corporate investment decisions on, particularly, risk-taking and investment efficiency. Existing theoretical studies on whether product market competition mitigates or exacerbates agency problems are inconclusive. Prior research generally finds that competition constrains management opportunism in reporting operating performance. However, the association between product market competition and managerial investment decisions has largely been unexplored. Design/methodology/approach – The primary measure of product market competition is the Herfindahl–Hirschman Index. The authors use regression analysis to examine the association between corporate risk-taking and over-investment of free cash flow (FCF) (as dependent variables) and product market competition (as an independent variable). Findings – Using firm-year observations from 1990 to 2010, the authors find that competition encourages managers to invest in risky investment. They also find that competition disciplines management on its use of FCFs. Overall, their results provide support for the disciplining role of product market competition in management investment decisions. The results are robust after they control for shareholder activism and executive compensations. Originality/value – The paper contributes to the literature by providing evidence of the disciplining role of product market competition in management investment decisions. First, the results suggest that competition encourages managers to invest in risky investment. One potential explanation for the results is that competition reduces opportunities for resource diversion for management personal benefits and, in turn, decreases management risk aversion. Another explanation is that competition forces management to take more risks for the long-term survival of the company. Second, the results indicate that competition disciplines management on its use of FCFs. Although firms in highly competitive industries make investment decisions that are less conservative, they tend to avoid suboptimal investment decisions, such as over-investment of FCF, compared to their counterparts.

Financial statement comparability and corporate investment efficiency

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ahmed Alhadi ◽  
Ahsan Habib ◽  
Grantley Taylor ◽  
Mostafa Hasan ◽  
Khamis Al-Yahyaee
Keyword(s):  
Firm Value ◽  
Market Competition ◽  
Product Market ◽  
Corporate Investment ◽  
Product Market Competition ◽  
Financial Statement ◽  
Investment Efficiency ◽  
Mediation Effects ◽  
Content Type ◽  
Large Sample

Purpose The purpose of this paper is to examine the relation between financial statement comparability and corporate investment efficiency of a large sample of US firms. Design/methodology/approach The authors use a large sample of US-listed firms from 1981 to 2013. The authors use several econometric methods including ordinary least square, firms fixed effects and mediation effects regression. Sensitivity tests that include the use of alternative measures of both the dependent and independent variables provide results that are consistent with the authors’ baseline model results. Findings The authors find that financial statement comparability mitigates risks associated with both under-investment and over-investment. They also find that product market competition mediates the relation between financial statement comparability and investment efficiency. The authors consider this to be a function of a competitive environment, whereby firms normally disclose less private information. This in turn reduces the effect of financial statement comparability on investment efficiency. Conversely, where there are higher levels of product market competition, it is less likely that firms will under-invest. Their results are consistent with these predictions. Originality/value The authors contribute to this growing field of research by providing evidence that financial statement comparability does in fact improve firms’ investment efficiency. Findings enhance our understanding of the relation between investment efficiency and financial statement comparability which is likely to have flow-on effects in terms of financial reporting quality and firm value. This study also contributes to research that links agency theory to financial statement comparability through an analysis of moral hazard and adverse selection tenets, and how it leads to reduced levels of investment inefficiency in a firm.

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