 Competition, peer firm effects, and cash compositionNam Le and Megan Ramsey Journal of Banking & Finance, 2024, vol. 160, issue C Abstract: We examine the relationship between competition and the composition of corporate cash. A precautionary motive might suggest firms increase the less risky pure cash component when the threat of competition increases. Using fluidity as a measure of competition and exploiting a change in import tariffs as an exogenous shock, we find firms increase the short-term investments component, which is less liquid and more risky. Furthermore, the market's valuation of short-term investments is lower than that of pure cash when competition increases. We posit peer effects as an alternative explanation for this behavior, where firms mimic rivals as a risk management strategy. We identify a causal relationship where firms attempt not only to mimic but also to leap-frog rival firms’ short-term investments. The mimicking of short-term investments is mitigated by stronger external governance. Overall, our findings suggest that competition and peer effects are important determinants of a firm's cash composition. Keywords: Peer effects; Product market competition; Short-term investments; Corporate cash (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:160:y:2024:i:c:s0378426624000128 DOI: 10.1016/j.jbankfin.2024.107092 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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