Product market competition and the cost of equity capital

Zhen Zheng, Yongjia Lin, Xiaoou Yu and Xinming Liu

Journal of Business Research, 2021, vol. 132, issue C, 1-9

Abstract: This paper provides empirical evidence that firms in more competitive industries have lower cost of equity capital than those in concentrated industries. The association between product market competition and the cost of equity capital is more pronounced with lower analyst coverage, lower forecast accuracy, higher forecast dispersion, and higher bid-ask spread. Using import tariff rate reductions as a quasi-natural experiment, we find that tariff reductions intensify domestic product market competition, which in turn reduces firms’ cost of equity capital. When the tariff rate reduction is larger, the more intensified competition reduces the cost of equity capital to a greater extent. Tariff rate reductions also influence firms’ financing policy, cash flow from operations, and growth rate.

Keywords: Product market competition; Cost of equity capital; Information asymmetry; Import tariff rate; Quasi-natural experiment (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:132:y:2021:i:c:p:1-9

DOI: 10.1016/j.jbusres.2021.04.013

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