The disciplinary role of product market competition on cash holding

This paper provides evidence supporting the disciplinary role of product market competition on cash holding. We use the regulation-induced IPO suspensions in China as shocks to product market competition. With a generalized difference-in-difference design, we find that reduced competition threat induced by rivals' IPO suspension increases incumbent companies' cash level by 1.0 percentage points. The effect of IPO suspension on cash holding is weakened when the product market is highly competitive before suspensions and more pronounced for companies with severe agency problems and loose governance mechanisms. Furthermore, we document that the marginal value of cash reduces during IPO suspension, and companies' cash level decreases when IPO restarts. Our paper contributes to the literature by providing the plausibly causal effect of product market competition on cash holding and an agency explanation from the perspective of competition's disciplinary role in mitigating managers' slack.