The influence of product market dynamics on a firm's cash holdings and hedging behavior

Prior work suggests that if a firm shares a larger proportion of its growth opportunities with rivals, an inability to fully invest in these opportunities leads to predatory behavior on the part of rivals and losses in market share. We examine whether firms manage this predation risk. We find inter-...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial economics 2007-06, Vol.84 (3), p.797-825
Main Authors: Haushalter, David, Klasa, Sandy, Maxwell, William F.
Format: Article
Language:English
Subjects:
Assets
Business strategies
Capital market
Cash holdings
Competition
Hedging
Interdependence
Investment decision
Market shares
Predation
Product market competition
Risk management
Securities analysis
Studies
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Prior work suggests that if a firm shares a larger proportion of its growth opportunities with rivals, an inability to fully invest in these opportunities leads to predatory behavior on the part of rivals and losses in market share. We examine whether firms manage this predation risk. We find inter- and intra-industry evidence that the extent of the interdependence of a firm's investment opportunities with rivals is positively associated with its use of derivatives and the size of its cash holdings. Moreover, an analysis of investment behavior provides evidence that if this interdependence is high, the management of predation risk provides strategic benefits. Our results indicate that predation risk is an important determinant of corporate financial policy choices and investment behavior.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2006.05.007