Browse > Article
http://dx.doi.org/10.5762/KAIS.2019.20.5.163

The Impact of Industry-level Competition on the Excess Stock Returns due to Changes in Cash Holdings  

Cho, Jung Eun (College of Business Administration, Pukyong National University)
Publication Information
Journal of the Korea Academia-Industrial cooperation Society / v.20, no.5, 2019 , pp. 163-169 More about this Journal
Abstract
This study examined whether industry-level competition affects excess stock returns because of changes in cash holdings. Competitive inter-company threats increase the possibility of the manager's replacement, and function to induce management to make their best efforts, resulting in the amount and quality of the information provided by the enterprise increasing. Therefore, as competition intensifies, agency problems are reduced and stock returns increase because the company's cash holdings are expected to increase. However, there is a view that firms in industries with severe competition tend to have high information asymmetry because competitors may compete in more favorable positions by using detailed information disclosed by the competing firms. Accordingly, as market competition intensifies, the excess stock returns resulting from increased cash holdings are expected to decline. These results show that excess stock returns because of increases in cash holdings increase as the degree of competition in the industry intensifies, thus supporting the positive effect of market competition. Overall, the results of this study provide an understanding that market competition plays an effective external governance mechanism and that investors positively evaluate the cash held by companies with severe industry competition.
Keywords
Industry-level Competition; External Governance Mechanism; Cash Holdings; Excess Stock Returns; Hirschman-Herfindahl Index;
Citations & Related Records
연도 인용수 순위
  • Reference
1 K. Lee, C. Lee, "Cash holding, corporate governance structure and firm valuation", Review of Pacific Financial Markets and Policies, Vol.12, No.3, pp.475-508, 2009. DOI: http://dx.doi.org/10.1142/S021909150900171X   DOI
2 S. Nickell, "Competition and corporate performance", The Journal of Political Economy, Vol.104, No.4, pp. 724-746, 1996. DOI: http://dx.doi.org/10.1086/262040   DOI
3 O. D. Hart, "The market mechanism as an incentive scheme", The Bell Journal of Economics, Vol.14, No.2, pp.366-382, 1983. DOI: http://dx.doi.org/10.2307/3003639   DOI
4 K. Schmidt, "Managerial incentives and product market competition", Review of Economic Studies Vol.64, No.2, pp.191-213, 1997. DOI: http://dx.doi.org/10.2307/2971709   DOI
5 B. Holmstrom, "Moral hazard in teams", The Bell Journal of Economics, Vol.13, pp.324-340, 1982. DOI: http://dx.doi.org/10.2307/3003457   DOI
6 A. Alchian, "Uncertainty, evolution and economic theory", Journal of Political Economy, Vol.58, pp.211-221, 1950. DOI: http://dx.doi.org/10.1086/256940   DOI
7 K. S. Park, H. S. Byun, J. H. Lee, "Study on the interaction of product market competition and internal corporate governance on corporate payout policy and investment decision", Asian Review of Financial Research, Vol.24, No.2, pp.483-523, 2011.
8 R. Lambert, C. Leuz, R. E. Verrecchia, "Accounting information, disclosure, and the cost of capital", Journal of Accounting Research, Vol.45, No.2, pp.385-420. 2007. DOI:http://dx.doi.org/10.1111/j.1475-679X.2007.00238.x   DOI
9 R. Verrecchia, J. Weber, "Redacted disclosure", Journal of Accounting Research, Vol.44, No.4, pp. 791-814, 2006. DOI:http://dx.doi.org/10.1111/j.1475-679X.2006.00216.x   DOI
10 W. Lanen, R. Verrecchia, "Operating decisions and the disclosure of management accounting information", Journal of Accounting Research, Vol.25, pp.165-189, 1987. DOI: http://dx.doi.org/10.2307/2491085   DOI
11 J. H. Kim, J. H. Chang, E. J. Yeo, "A study of accurate timing of disclosure on annual earnings", Korean Accounting Review, Vol.31, No.2, pp.35-55, 2006.
12 A. Dittmar, J. Mahrt-Smith, "Corporate governance and the value of cash holdings", Journal of Financial Economics, Vol.83, No.3, pp.599-634, 2007. DOI: http://dx.doi.org/10.1016/j.jfineco.2005.12.006   DOI
13 J. Harford, "Corporate cash reserves and acquisitions", The Journal of Finance, Vol.54, pp.1969-1997, 1999. DOI: http://dx.doi.org/10.1111/0022-1082.00179   DOI
14 M. Faulkender, R. Wang, "Corporate financial policy and the value of cash", Journal of Finance, Vol.61, No.4, pp.1957-1990, 2006. DOI:http://dx.doi.org/10.1111/j.1540-6261.2006.00894.x   DOI
15 D. Dhaliwal, S. Huang, I. Khurana, R. Pereira, "Product market competition and conditional conservatism", Review of Accounting Studies Vol.1, No.4, pp.1309-1345. 2014. DOI: http://dx.doi.org/10.1007/s11142-013-9267-2
16 S. K. Sohn, I. H. Shin, "A study on the effect of product market competition on analyst forecast", Korean Management Review, Vol.43, No.4, pp.1029-1058, 2014.
17 S. K. Sohn, E. C. Lee, "Information content study on the review opinions of semi-annual financial statements", Korean Accounting Review, Vol.30, No.1, pp.1-34, 2005.
18 T. Bates, K. Kahle, R. Stulz, "Why do U.S. firms hold so much more cash than they used to?", The Journal of Finance, Vol.64, No.5, pp. 1985- 2021, 2009. DOI:http://dx.doi.org/10.1111/j.1540-6261.2009.01492.x   DOI
19 S. C. Myers, R. G. Rajan, "The paradox of liquidity", The Quarterly Journal of Economics, Vol.113, pp.733- 771, 1998. DOI: http://dx.doi.org/10.1162/003355398555739   DOI
20 E. Lie, "Excess funds and agency problems: an empirical study of incremental cash distributions", The Review of Financial Studies, Vol.13, pp.219-248, 2000.   DOI
21 S. H. Park, K. H. Yon, "The effect of agency problem on the value of cash holdings", The Korean Journal of Financial Management, Vol.26, No.4, pp.1-34, 2009.
22 B. Y. Kim, K. B. Jeong, "Agency costs, information asymmetry, and the value of cash holdings", The Korean Accounting Journal, Vol.23, No.5, pp.459-485, 2014.
23 A. Shleifer, R. Vishny, "A survey of corporate governance", Journal of Finance, Vol.52, pp.737- 783. 1997. DOI: http://dx.doi.org/10.1111/j.1540-6261.1997.tb04820.x   DOI
24 M. Darrough, N. Stoughton, "Financial disclosure policy in an entry game", Journal of Accounting and Economics, Vol.12, No.1, pp.219-243. 1990. DOI:http://dx.doi.org/10.1016/0165-4101(90)90048-9   DOI
25 Y. Chen, W. Chuang, "Alignment or entrenchment? corporate governance and cash holdings in growing firms", Journal of Business Research, Vol.62, No.11, pp.1200-1206, 2009. DOI: http://dx.doi.org/10.1016/j.jbusres.2008.06.004   DOI