Cash Holdings and Competition

Technology spillovers and corporate cash holdings

“…The results suggest that, when facing large stock of outside R&D that is similar to a firm's own technology, the firm tends to hold more cash to preserve financial flexibility. The positive effect of market rivalry on cash reserves is consistent with studies showing that product market competition plays a key role in firm cash policy (e.g., Hoberg, Phillips and Prabhala, 2013, hereafter HPP;Schoubben and Van Hulle, 2010;and Morellec and Nikolov, 2009). It is also noteworthy that while the spillover and rivalry measures are correlated, our results indicate that each factor has independent incremental explanatory power on cash holdings.…”

Market Share and Cash Policy: Evidence from Western European Companies

“…Haushalter et al (2007) show that this predation risk is positively associated with the level of cash holdings. Using similar arguments, Morellec and Nikolov (2008) suggest that the recent findings of Bates et al (2009) that US firms hold more cash than they used to, can be partly attributed to a rise in industry competitiveness over the last decade. In a similar vein, Gaspar and Massa (2006) investigate the link between the competitive environment and stock market performance, and attribute the rise in idiosyncratic volatility of stocks to the increase in industry competitiveness.…”

“…The selection of the relevant industry specification deserves further attention. In line with Morellec and Nikolov (2008), we base our industry specification on industry codes. More specifically, we include all firms with consolidated financial statements of 14 European countries in our data set.…”

“…Firms tend to hedge against a possible shortfall of financial resources in the future by maintaining a cash buffer. Moreover, an important driver of these hedging needs has been shown to be an increase in industry competitiveness (e.g., Morellec & Nikolov, 2008;Gaspar & Massa, 2006). Since firms want to avoid underinvestment, increased competitive risk results in an increase in cash holdings for hedging purposes (Opler et al, 1999;Mikkelson & Partch, 2003;Frésard, 2010).…”

“…Elaborating on this latter issue, a recent strand of literature highlights the link between corporate cash holdings -as a hedging tool against competition-and product market dynamics. Research shows that firms tend to hold more cash when they are exposed to more intensive product market competition (Haushalter, Klasa, & Maxwell, 2007;Morellec & Nikolov, 2008). Firms take into account the risk that rivals may prey on them, which in turn leads to a positive relationship between cash balances and predation risk within an industry.…”