Product market competition, corporate investments and risk.

摘要

This doctoral dissertation examines the impact of product market competition on the cash flow investments and risk. The dissertation is comprised of three essays. First essay investigates the link between a firm's competitive environment and the ratio of idiosyncratic volatility to systematic volatility. I postulate that competition has a higher effect on idiosyncratic volatility than the systematic volatility for two reasons. First, market power works as a tool that passes on firm-specific cost shocks to customers but is irrelevant to passing on the industry-wide cost shocks. Second, firm's competitive advantage relative to its peers in the industry is affected by changes in firm-specific costs rather than by the industry-wide costs. The effect of firm-specific costs on competitive advantage is expected to be larger when there are many rivals in the industry. Accordingly, I find that competition increases the idiosyncratic volatility more significantly than the systematic volatility. Given that R-square is a function of these two risks, the results show that economy-wide competition plays a role in explaining the R-square. The second essay examines the effect of product market competition on cash-flow investments. Given that competition increases financial constraints, as indicated by several recent studies, I claim that competition may prevent firms from undertaking valuable investments using the cash flow. The results are consistent with this prediction as I find that competition exacerbates the effect of financial constraints and reduces the investment of cash flow in valuable projects. I also show that the financial constraints of competition, and not the competition per se, perform a major disciplinary role of reducing overinvestment. Therefore, our perception to competition as a corporate governance tool could have been overestimated. The third essay investigates the effect of product market competition on the exposure of firms' return to consumption fluctuation (C-CAPM beta). This kind of exposure is considered a main determinant of the security's systematic risk. I find that higher competition reduces C-CAPM beta. This result is attributed to the output reaction by firms in competitive industries to consumption fluctuation as opposed to price reaction by firms in low-competition industries. The findings of this essay are in contrast to prior studies that document a positive association between competition and systematic risk. While these studies applied standard CAPM to measure the systematic risk, my study applies Consumption-CAPM.