Threat or opportunity: product market competition and enterprise digital transformation

THE theory of the economies of scale is the theory of the relationship between the scale of use of a properly chosen combination of all productive services and the rate of output of the enterprise. In its broadest formulation this theory is a crucial element of the economic theory of social organization, for it underlies every question of market organization and the role (and locus) of governmental control over economic life. Let one ask himself how an economy would be organized if every economic activity were prohibitively inefficient upon alternately a small scale and a large scale, and the answer will convince him that here lies a basic element of the theory of economic organization. The theory has limped along for a century, collecting large pieces of good reasoning and small chunks of empirical evidence but never achieving scientific prosperity. A large cause of its poverty is that the central concept of the theory-the firm of optimum size-has eluded confident measurement. We have been dangerously close to denying Lincoln, for all economists have been ignorant of the optimum size of firm in almost every industry all of the time, and this ignorance has been an insurmountable barrier between us and the understanding of the forces which govern optimum size. It is almost as if one were trying to measure the nutritive values of goods without knowing whether the consumers who ate them continued to live.

Product market competition affects management's resource allocation and cost adjustment decisions. It also affects cost stickiness. This paper looks at the impact of product market competition on cost stickiness in different economic environments. Using quasi natural experiment and the samples in Chinese capital market, this paper analyzes and tests these questions. We conclude that (1) in emerging markets, product market competition reduces cost stickiness. (2) For enterprises with differentiation strategy, the impact of product market competition on cost stickiness is not significantly weakened. (3) For enterprises with state‐owned property rights, the impact of product market competition on cost stickiness is significantly weakened. In addition, financial strength and industry competitive position also weak the impact of product market competition on cost stickiness.

This paper investigates the impact of product market competition (PMC) on firms’ adoption of zero-leverage (ZL) strategies and examines whether this relationship is influenced by earnings volatility. Using data from 1989 to 2019, we analyze the PMC and ZL behavior of firms using logistic regression. Our results indicate that as PMC intensifies, firms are more likely to adopt ZL policies. This effect is stronger in firms with higher earnings volatility, suggesting a significant interaction between PMC and earnings volatility in shaping capital structure decisions. This study extends existing research by highlighting the role of earnings volatility in strengthening the relationship between PMC and ZL behavior, offering new insights into the dynamics between market competition, financial decisions, and firm risk.

Purpose This study aims to examine the impact of product market competition (PMC) from existing rivals and potential market entrants on earnings quality (EQ) in China. Design/methodology/approach This study examines the impact of PMC on EQ by using the EQ measure of Kothari et al. (2005), and it uses measures for competition from existing and potential rivals. This study analyzed Chinese firms for the period of 2000-2014 and also examined the impact of International Financial Reporting Standards (IFRS) adoption and state ownership on the relationship between PMC and EQ. Findings This study found a positive relationship between PMC and EQ. It also documents that competition from existing rivals does not improve EQ by reducing real activity manipulation, but competition from potential entrants does. The findings propose that market competition from existing rivals is a relevant factor for determining EQ before and after IFRS adoption, but competition from potential entrants improves EQ only after IFRS adoption. Moreover, the results suggest that market competition plays no role in improving the EQ of state-owned enterprises (SOEs). Originality/value The results support the argument that PMC acts as a governance mechanism and influences managerial decisions regarding financial reporting. Our study also helps to understand the impact of change in the regulatory regime, i.e. IFRS adoption, on the relationship between PMC and EQ. This study also helps demonstrate the impact of competition on management decisions with respect to the EQ of SOEs.

PurposeThis study aims to investigate the impact of product market competition on the relationship between firm digital transformation and international diversification. It aims to uncover how competition moderates this relationship and to reveal the nonlinear dynamics between digital transformation and international diversification in strategic decision-making processes.Design/methodology/approachUsing a panel logistic regression analysis, this study examines data from 235 Malaysian nonfinancial listed companies from 2012 to 2019. The analysis focuses on the manufacturing and technology industries due to the availability of digital transformation data, leading to a data set of 1,180 year-firm observations.FindingsThe results reveal a nonlinear relationship between digital transformation and international diversification, intensified by product market competition. Initially, digital transformation positively affects international diversification, but this effect turns negative as competition increases. Robustness checks validate these findings, indicating that competition’s impact varies with the level of digital transformation.Research limitations/implicationsThis study’s findings are based on text analysis as a proxy for digital transformation, which may not fully capture organizational changes. Future research could use reported transformation costs or mandatory disclosures. In addition, this study focuses solely on international diversification, excluding other forms of diversification and financial constraints.Practical implicationsPolicymakers should recognize that high product market competition can negate the benefits of digital transformation on internationalization. They need to balance promoting digital transformation with addressing competitive challenges. Managers should analyze the competitive landscape before pursuing international expansion, as high competition can diminish the advantages of digital transformation.Originality/valueThis research enriches agency and resource-based view theories by revealing the complex dynamics between digital transformation, competition and international diversification. It introduces a parabolic relationship between competition and diversification, challenging traditional assumptions and providing a comprehensive framework for understanding strategic decisions in competitive environments.

This thesis consists of two essays on the impacts product market competition has on the real investment efficiency of firms. While the first essay looks at this question through the corporate governance angle and finds product market competition complements institutional investors in disciplining firms, the latter one studies the impacts from an information production point of view and concludes competition reduces the incentive of firms to acquire information thereby reduces investment efficiency.
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\nUsing product market competition as a proxy for external corporate governance, the first essay documents a sizeable difference between the governance impact of institutional investors on firms with strong and weak external corporate governance. Higher institutional ownership is associated with real efficiency of firms, but only when external corporate governance is strong. The real efficiency is reflected in higher investment sensitivity to investment opportunities and higher firm value. Utilizing the passing of business combination laws as a negative shock to external corporate governance, the essay identifies that firms with higher institutional ownership suffer a larger decrease in real efficiency, suggesting external corporate governance such as product market competition is critical for institutional investors in disciplining firms.
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\nThe second essay attempts to figure out the impact of product market competition from an ex ante point of view. Specifically, how does product market competition change the incentive of firms to acquire information about investment opportunities ex ante? The essay provides both a model and a series of extensive empirical tests. The model features a two-stage Bayesian game in differentiated products market competition. This essay finds that competition causes firms to acquire less information and that investment becomes more inefficient in competitive industries. Empirically investment efficiency is measured by a latent variable technique and related to competition using a Herfindahl-Hirschman index as well as more exogenous measure such as trade costs. The panel regression analysis provides strong support for the theory and shows that investment is more efficient in concentrated industries.

Synopsis The research problem This study analyzes the relationship between product market competition (PMC) and stock price crash risk in China, especially for firms with weak corporate governance and a lower-quality information environment. Motivation Emerging capital markets like China have less-developed financial systems and institutions compared to developed capital markets like Europe and the United States, making them more susceptible to stock price crash risk. The impact of product market competition (PMC) on corporate decision-making has attracted considerable attention from scholars, especially given the increasingly intense and complex strategic competition in global markets and uncertainty in the world today. However, the effect of PMC on a firm’s stock price crash risk has not been thoroughly explored. Therefore, this study investigated how PMC affects managers’ tendency to hoard bad news and how this behavior contributes to the risk of stock price crashes. The test hypotheses We tested two competing hypotheses: PMC is negatively correlated with crash risk, and PMC is positively correlated with crash risk. Target population This study should be of interest to stakeholders, including firm managers, practitioners, regulatory authorities, policymakers, and investors. Adopted methodology This study employed ordinary least squares (OLS), difference-in-differences analysis (DID), and path analysis. Analysis Using a sample of Chinese A-share listed manufacturing firms from 2000 to 2021, this study found that competitive pressure from the product market encouraged managers to hide bad news, thereby increasing future stock price crash risk. Moreover, we performed additional tests to examine how PMC affected stock price crash risk. Findings We found robust evidence that PMC significantly increases stock price crash risk. Further tests showed that the effect of PMC on crash risk is more pronounced for firms with weak corporate governance and a lower-quality information environment. We also provide evidence that firms in highly competitive industries tend to disclose fewer negative words in the management discussion and analysis section of the annual report and fewer risk factors in the internal control report. Moreover, we show that operational risk is the underlying driver through which PMC affects crash risk.

PurposeThis paper aims to document the impact of product market competition on the value of analyst coverage.Design/methodology/approachThis paper uses variety of estimation techniques (panel regression as well as the quantile regression approaches) and the data for nonfinancial firms from India to document the impact of product market competition on the value of analyst coverage during the period between 2001 and 2018.FindingsThe findings show that the value of analyst coverage is an increasing function of product market competition. The authors argue that better information environment associated with firms operating in industries with high competition improves the quality of research done by analysts, thereby increasing the value of analyst coverage. The study results are consistent across different subsample and remain quantitatively the same when the authors use alternate estimation procedures.Originality/valueThe paper provides evidence regarding the role played by product market competition – a publicly available measure – on the value of research produced by analysts within the context of emerging markets.

PurposeThe purpose of this paper is to examine the impact of product market competition on dividend payout and share repurchases in Australia in which a full dividend imputation system has been in place since 1987.Design/methodology/approachPanel data estimation with industry and year-fixed effects is employed to examine the role of industry competition on dividend payout and share repurchases. The paper uses a sample of ASX200 non-financial firms, including 4,272 observations over the period 1992–2015. To address the endogeneity problem, the authors utilize the event of Australia–United States Free Trade Agreement (AUSFTA), which became effective on 01 January 2005, and perform a difference-in-difference analysis.FindingsThe authors find that firms operating in competitive markets are likely to pay more dividends and repurchase more shares to reduce agency costs. The positive relation between industry competition and dividends is stronger among firms where the CEO and the Chairman of the Board are the same person and among firms with higher market-to-book ratio and higher standard deviation of stock returns. The study results are robust when the authors account for the impact of franking credit on dividend payment. In the difference-in-difference analysis, the authors find strong evidence of a casual relation that product competition drives changes in dividend policy.Practical implicationsThe findings are consistent with the notion that intense product market competition can mitigate agency conflicts between managers and shareholders and with the information signalling explanation of market competition. As such, regulators may want to introduce policies that encourage more market competition (e.g. market deregulation) to enhance market efficiency.Originality/valueThis study incorporates product market competition in explaining the firm payout policy.

As an important external governance mechanism, the impact of product market competition on corporate governance and investment and financing has long attracted the interest of economists and financial scholars. Although a large number of studies have focused on the economic consequences of product market competition in terms of investment, most of the research methods are based on cross-sectional analysis, such as the investment-investment opportunity sensitive model of Fazzari, et al.（1988）, Richardson’s over-investment model（2006）, the degree of market competition represented by the HHI, Tobin Q model, Sales Acceleration Model, and so on. These studies tend to support that product market competition can improve investment efficiency, but the conclusions lack robustness, and some even have fallacies. Therefore, it is necessary to explore new methods to promote the expansion of research on the economic consequences of product market competition and the influencing factors of enterprises’ over-investment.In order to further improve the level of opening up to the outside world, China has made a substantial adjustment to the Catalogue of Industries for Guiding Foreign Investment in 2011. Restrictive foreign investment projects have been greatly reduced, and the market access for primary, secondary and tertiary industries has been fully relaxed. This policy provides an ideal quasi-natural experimental platform for us to overcome endogenous problems by using double difference method: （1）With the improvement of opening-up level, the competition level of the domestic market will increase correspondingly（Jiang and Lu, 2018）.（2）The purpose of adjusting the Catalogue is to improve the level of market opening to the outside world, not to affect the efficiency of enterprises’ investment.（3）Enterprises cannot accurately predict the specific time and scope of the adjustment of the Catalogue, which is exogenous.（4）The adjustment scope of the Catalogue in 2011 is relatively large, and the seven industries classified by the CSRC in 2012 are designed as influential models. The impact effect is obvious.（5）The sample period selected in this paper is more balanced than before and after 2011, which is convenient to observe the difference of investment efficiency before and after policy changes. At the same time, in order to overcome the limitations of investment efficiency measurement in previous studies, this paper uses the DEA method to measure the investment efficiency of enterprises.This paper finds that the improvement of product market competition is helpful to improve the efficiency of enterprise investment. Further mechanism tests show that external market competition can improve investment efficiency by restraining agency conflicts and improving incentive effectiveness. At the same time, for state-owned enterprises and functional enterprises, the improvement of product market competition plays a greater role in improving investment efficiency. The conclusions of this paper have important policy implications: Firstly, the conclusions support the general policy tendency of further expanding China’s opening to the outside world, and the market competition brought about by expanding the opening will play a positive decision-making effect at the micro level. Secondly, they support senior managers’ shareholding policy in the process of mixing reform in China. We should design not only agency cost reduction mechanisms（such as the restraint and check-and-balance mechanism）, but also reasonable incentive mechanisms（such as executive shareholding）, which has positive economic consequences. Thirdly, for state-owned enterprises and functional enterprises, we should introduce or increase industrial openness, increase market competition, eliminate factors affecting market competition, strengthen the role of the market mechanism, and let the market mechanism play an investment regulating role through the product market, capital market and manager market, which will be conducive to the improvement of enterprise efficiency.

The objective of this paper is to examine the impact of product market competition on earnings quality. Based on a sample from the US manufacturing sector for the period 1996–2005, we find consistent evidence showing a positive relation between product market competition and earnings quality. Additional tests also confirm a positive relation between product market competition and the precision of public and private information held by investors and analysts. We also provide evidence that firms competing in concentrated and heterogeneous industries are associated with a number of earnings attributes and information quality not shared by those competing in concentrated but homogeneous industries. These findings are consistent with the intuition that firms enjoying a monopolistic advantage tend to avoid the attention of their competitors and politicians by creating a more opaque information environment.

This article assesses whether the intensity of product market competition is a factor affecting economic growth (measured by the growth rate of real GDP per capita) and whether this impact depends on the model of capitalism. The study covers the 1997–2015 period and all EU28 countries. Product market competition is measured by two types of variables: product market regulation indicators and the number of enterprises. New elements in the analysis include, among others, nonlinear impact and overlapping observations. The regression equations are estimated on the basis of Blundell and Bond’s GMM system estimator. The results generally indicate that stronger product market regulations (and theoretically lower product market competition) are linked with faster growth of output. However, the impact of product market competition on economic growth depends on the type of capitalism. For post-socialist countries, unlike the Western European model of capitalism, more regulation tends to reduce the rate of economic growth.

PurposeThe purpose of this paper is to explore the impact of product market competition on the risk of stock price crash based on the degree of industry competition and the competitive position of enterprises.Design/methodology/approachThis paper chooses the data of Shanghai and Shenzhen A-share listed companies from 2009 to 2017 as samples and uses a threshold regression model to explore the impact of product market competition on the risk of a stock price crash.FindingsThe results show that: the overall level of industry competition is negatively correlated with the risk of stock price crash; the competitive position of enterprises and the risk of a stock price crash. The correlation is not significant: for high competitive enterprises, the degree of industry competition is negatively correlated with the risk of stock price crash; for low competitive enterprises, the degree of industry competition is positively correlated with the risk of a stock price crash and the conclusions obtained have passed the robustness test.Originality/valueThis paper not only enriches the literature on the relationship between product market competition and the risk of stock price crash but also has reference significance for supervisors to allocate resources to supervise information disclosure of listed companies.

PurposeThis study explores whether product market competition is a substitute for or complementary to good internal governance through promoter holdings. Specifically, it examines the impact of product market competition on the linkage between promoter ownership and firm value and investigates whether this impact varies with the type of blockholders and level of ownership.Design/methodology/approachThe authors used a fixed-effect panel regression method to analyze 1,136 National Stock Exchange-listed firms with 10,770 observations between the years 2005 and 2017. The authors computed product market competition using the Hirschman–Herfindahl Index and used the two-stage least squares regression model to address the issue of endogeneity.FindingsCompetition is a substitute for good corporate governance, especially in highly competitive industries, while promoters enhance firm value only in less competitive industries. This supports the theory that competition hinders a manager's “quiet life” hypothesis and creates disciplinary pressure to perform well. Additionally, the authors find that competition acts as a complement to promoters who are state-owned blockholders, while it acts as a substitute for promoters who are family-owned and private-owned blockholders.Originality/valueThis is possibly among the earliest attempts to integrate promoter ownership, product market competition, and firm value with the type of blockholder, especially in the context of the Indian market after 2005. The authors also provide evidence of situations in which both external and internal governance mechanisms either synergize or mitigate each other.

This paper examines the impact of product market competition on the dividend policy of Indian firms. We have taken product market competition as the proxy of external corporate governance. This study has used 1142 non-financial, non-utility, and non-government Indian firms listed in NSE from 2001 to 2018. For the purpose, five different product market competition and three various dividend measures were employed. Also, the interaction between product market competition (external) and board corporate governance (internal) on dividend policy was examined using a newly developed board corporate governance index (BCGI). The findings suggest that non-competitive firms are more likely to pay higher dividends than competitive firms. Non-competitive firms face more significant agency problems and therefore, pay higher dividends than competitive firms. Finally, the study found that the influence of internal corporate governance on dividends to be much higher and significant in the case of non-competitive firms compared to competitive firms. Overall, the findings of this study offer consistent evidence that external corporate governance and dividend policy are substitutes, and higher agency costs and higher internal governance strengthens this relationship. The outcomes of this study can help the managers to more precisely take dividend decisions by looking at the competition level in the market. The results suggest that managers should pay less dividends when firms operate in a high-competitive industry and vice-versa. The policymakers should design corporate governance norms after considering the competitiveness of the industry.