Product market competition, financial flexibility, and investment-q sensitivity: evidence from the US and China

Abstract

ABSTRACT Maintaining financial flexibility to relax product market competition has drawn great attention from scholars and practitioners in past decades. By examining the intensively growing capital market in China and meanwhile making comparisons with the U.S. capital market, the data from the period of 2008 to 2020 shows that there is a positive relationship between product market competition and financial flexibility, and firms facing greater product market competition have higher investment-q sensitivity. The merit of obtaining two distinct samples to test the hypotheses is to confirm that different business characteristics and nuanced economic environments are harmonized with competitive product markets, and the relationships among product market competition, financial flexibility, and investment-q sensitivity are stable. It is thus concluded that competition pressure forces firms to increase financial flexibility, and firms facing higher product market competition are likely to pay more attention to investment opportunities, and meanwhile have higher investment-q sensitivity. The relationship between product market competition and investment-q sensitivity weakens after firms maintain financial flexibility to relax product competition pressure, but do not disappear completely. The results provide firms with practical suggestions about how to react to product market competition.