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

David Haushalter, Sandy J Klasa, William F. Maxwell

Research output: Contribution to journalArticle

103 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)797-825
Number of pages29
JournalJournal of Financial Economics
Volume84
Issue number3
DOIs
StatePublished - Jun 2007

Fingerprint

Hedging
Product market
Cash holdings
Market dynamics
Predation
Interdependence
Industry
Investment behavior
Strategic risk
Investment opportunities
Proportion
Financial policy
Growth opportunities
Market share
Choice behavior
Policy choice
Derivatives
Firm investment

Keywords

  • Cash holdings
  • Product market competition
  • Risk management

ASJC Scopus subject areas

  • Accounting
  • Strategy and Management
  • Economics and Econometrics
  • Finance

Cite this

The influence of product market dynamics on a firm's cash holdings and hedging behavior. / Haushalter, David; Klasa, Sandy J; Maxwell, William F.

In: Journal of Financial Economics, Vol. 84, No. 3, 06.2007, p. 797-825.

Research output: Contribution to journalArticle

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