Do all diversified firms hold less cash? The role of product market competition

Abstract

We examine the relationship between corporate diversification and cash holdings for a large sample of over 17,500 firms from 12 countries for the period from 1998 to 2013. In contrast to previous studies where diversified U.S. firms hold significantly less cash than their focused counterparts, diversification has a much weaker effect on cash for the international firms in our sample. We show that product market competition is the most important driver of this result. The cash holdings of diversified firms from countries with high import penetration, as well as firms with product divisions in highly competitive industries, are not significantly lower than the cash holdings of focused firms. We provide evidence supporting two channels via which product market competition affects the diversification effect on cash. The competition effect is statistically and economically important only for high R&D intensity firms and for firms with high productivity growth uncertainty.