Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings

  • Author(s): LAURENT FRESARD
  • Published: May 07, 2010
  • Pages: 1097-1122
  • DOI: 10.1111/j.1540-6261.2010.01562.x


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.

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