The influnece of product market dynamics on a firm's cash holdings and hedging behavior 简雪莹 17721003

Abstract: a firm shares a larger proportion of its growth opportunities with rivals an inability to fully invest in these opportunities predatory behavior on the part of rivals and losses in market share 1.examine...... 2.find...... 3.analyse...

Introduction: What is the predation risk:refer to the risk of underinvestment leading to a loss of investment opprtunities and market share to product market rivals . 1.This paper investigate the role of predation risk on corporate financial policy decisions.And examine how this risk is associated with corporate investment bahavior.

Introduction: 2.The greater this interdependence,the greater is the predation risk. Three factors taht affect the interdependence of a firm's investemnt strategies with industry rivals First,we consider industry concentration show that predation is more likely to occur in more oligopolistic industries in which there is greater interdependence in investment decisions. Second,we look within industries and consider the similarity of a firm's operations with its rivals,as measured by the absolute deviation between the firm's capitial- to- labor ratio and its industry median for this ratio. Finally,we consider the extent to which a firm's growth opportunities co-vary through time with those of its industry rivals,proxied by the correlation of the firm's stock returns with industry sock returns.

Introduction: 3.Examine currency swap usage by Standard&Poo's500 manufacturing firms from 1993 to 1997 and corporate cash holdings of Compustat manufacturing firms over the 1993 to 2001 period. 4.Find that the association between predation risk and financial policy choice is more important in industries with larger growth opportunities. 5.Fianlly,examine the nature of the relation between cash holdings and derivatives usage.

This study contributes in three ways: First,we increase understanding of how a firm's investment and financing policies are linked to its product market environment. Second,we shed further light on the determinants of corporate risk management activities. Finally,our results also contribute to understanding the role of corporate cash reserves.

Related literature Myers and Majluf (1984),Jensen and meckling (1976) and Myers(1977) Stula（1990），Bessembinder(1991),and Froot,Scharfstein,and Stein(1993).

Hypothesis development and empirical prediction： Hypothesis1.Firms with more interdependent groth opportunities with rivals are more likely to use dervatives or to hold large cash balance. Hypothesis2.In the product market context there is a substitute relation between cash holdings and dervatives ues.

two different samples: 1.S&P500manufacturing firms from 1993-1997.(For tests concerning derivatives) 2.The population of Compustat manufacturing firms included on the Compustat database over the 1993-2001 period.(For tests related to cash holdings)

Sample: 1.Sample used for tests related to derivatives usage 2.Sample used for tests related to cash holdings

proxy variables used for interependence of investment opportunities with rival firms:Because interdependence of investment opportunities is not directly observable,we rely on proxies.Three different proxy variables are used: 1.Industry concentration measures 2.Measure of similarity of operations 3.Measure for the covariance of firm growth opportunities with those of industry rivals

Empirical analysis:The first question we investigate is whether Whether firms that face greater predation risk hold more cash or are more likely to use derivatives.We measure predation risk using proxies for the interdependece of a firm's investment opportunities with rivals. 1.Univariate findings

Table 2 Descriptive statistics of cash holdings

Table3 descriptive statistics of currency swap usage

2.Multivariate findings:we examine in a multivariate setting the effect of product market dynamics on corporaye cash holdings and derivatives use. (1)Inter-industry evidence Four model:the first and third models in Table 4 are pooled regressions. the second and fourth models use firm-specific time-series means for each variable.

Table4 Regression of cash holdings on industry concentration measures

(2)intra-industry evidence Our first intra- industry measure for predation risk is the absolute value of the deviation of a firm's capital- to-labor ratio from the meaian ratio for its industry,as defined by Mackay and phillips. The models in the Table6 and Table 7.

Table6Regressions of cashholdings on absolute value of capital-to-labor deviation and correlation of firm stock returns with industry stock returns

Table 7 Probit models of the decision to use currency swaps on absolute value of capital-to-labor deviation and correlation of firm stock returns with industry stock returns

(3)Predation risk,cah holdings,and investment We investigate this issue by examining changes in firm-level investment around changes in firm-level investment around changes in industry coditoncoditions.For this analysis,we focus on a firm's cash holdings,instead of its use of derivatives.

Tale 9 Probit models of the decision to increase annual research and development and capital expenditures

in explaining hedging behavior? Does industry concentration increase the importance of common technology in explaining hedging behavior? The relation between cash holding and derivatives use:That is a substitute relationshio exists between the use of cash holdings and derivatives if they provide firms with similar product market benefits.

conclusion The extent to which a firm has interdependent growth propects with rivals is positively associated with its use of derivatives and the amount of its cash holdings.For firms this interdependence is high,the management of predation risk provides strategic benefits. The paper results indicate that corporate cash holdings and derivatives usage are equilibrium outcomes that are simultaneously determined by a firm's financing,investment,and product market environment. Two iplication.

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