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Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings



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    • Laurent Frésard is from HEC Paris. This paper is based on the first chapter of my dissertation at the University of Neuchatel. I am extremely grateful to Michel Dubois (Chair), François Degeorge, Michel Habib, Erwan Morellec, and Milad Zarin for many helpful discussions. I also thank Tom Berglund; François Derrien; John Graham (the Co-editor); Rachel Hayes; Campbell Harvey (the Editor); Uli Hege; Jean Imbs; Mesrop Janunts; Jens Martin; Sebastien Michenaud; Christophe Pérignon; Evgeny Plaksen; Gordon Phillips; Enrique Schroth; Linus Siming; René Stulz; Philip Valta; an anonymous referee; an anonymous associate editor; and seminar participants at EPFL, Imperial College London, HEC Paris, the University of Lugano, the University of Lausanne, the 2009 Winter European Finance Conference in Klosters, the 2008 Frontiers of Finance Conference in Belize, the 2008 Chicago Quantitative Alliance (CQA) Meeting in Chicago, the 6th Swiss Doctoral Workshop in Finance in Gerzensee, the first Swiss Corporate Finance Day in Neuchâtel, the 2008 EFA meeting in Athens, the 2008 EFMA meeting in Athens, and the 2007 French Finance Association Meeting in Paris for their valuable comments and suggestions.


This paper shows that large cash reserves lead to systematic future market share gains at the expense of industry rivals. Using shifts in import tariffs to identify exogenous intensification of competition, difference-in-difference estimations support the causal impact of cash on product market performance. Moreover, the analysis reveals that the “competitive” effect of cash is markedly distinct from the strategic effect of debt on product market outcomes. This effect is stronger when rivals face tighter financing constraints and when the number of interactions between competitors is large. Overall, the results suggest that cash policy encompasses a substantial strategic dimension.