High Product Market Competition Research Articles

Capital market opening, digital transformation and corporate risk-taking ——empirical evidence from Shanghai Shenzhen-Hong Kong stock connect

"Shanghai-Hong Kong stock connect" and "Shenzhen-Hong Kong stock connect", as important policies for the two-way opening of China's capital market, have positive effects on expanding investment channels for investors and improving market liquidity. Taking Shanghai Shenzhen-Hong Kong stock connect as a quasi natural experiment, this paper examines the impact of capital market opening on corporate risk-taking and its mechanism by using a multi period DID model. The empirical results show that the Shanghai Shenzhen-Hong Kong stock connect can reduce corporate risk-taking, and digital transformation plays a positive moderating role between the two; the mechanism analysis finds that the Shanghai Shenzhen-Hong Kong stock connect reduces corporate risk-taking by increasing analysts' attention, and this indirect impact process is also positively moderated by digital transformation. The heterogeneity test finds that the impact of Shanghai Shenzhen-Hong Kong stock connect on corporate risk-taking is mainly reflected in the companies with higher product market competition and faster regional marketization process. The above conclusions provide empirical evidence for the effectiveness of the capital market opening policy at micro level, and provide enlightenment for the role of digital transformation in promoting healthy development of the capital market.

Effect of ESG performance on stock price crash risk: evidence from China

ABSTRACT This study investigates the impact of ESG performance on stock price crash risk using a dataset of Chinese-listed firms in the period 2015 – 2020. Empirical evidence reveals a negative association between ESG performance and stock price crash risk, particularly under high product market competition conditions. Mechanism analysis suggests that ESG performance reduces stock price crash risk by alleviating maturity mismatch and optimizing debt maturity in investment and financing, but only when market competition is intense. These findings align with the resource dependence theory, indicating that strong ESG performance enhances a firm’s ability to acquire resources and mitigate stock price crash risk in highly competitive environments. Consequently, ESG performance not only augments a firm’s competitive advantage but also serves as a risk reduction tool, enabling investors to construct more sustainable investment portfolios.

The impact of trademark intensity on firm performance: Unraveling the role of product market competition, total factor productivity, and SG&A efficiency

AbstractUsing the market‐based‐view of the firm, this study investigates the relationship between trademark intensity and firm performance under the conditions of product market competition, total factor productivity, and SG&A efficiency. Higher trademark intensity is more positively associated with performance, and this positive association is amplified under higher product market competition or weakened under higher SG&A efficiency or total factor productivity. To address potential endogeneity, we employ partialing out lasso regression and cross‐fit partialing out lasso regression techniques, which yield consistent results. The findings provide valuable insights into the interplay between trademark intensity and firm performance.

Product market competition and target ratcheting

ABSTRACT This study examines the effect of product market competition (PMC) on target ratcheting by conducting an OLS (ordinary lease squares) regression model that utilizes both the revision of targets and deviation of targets to measure target ratcheting. Using executive EPS targets from S&P 1500 firms from 2012 to 2020, I find that higher PMC, as measured by TNIC similarity scores, leads to less pronounced target ratcheting and asymmetric target ratcheting, indicating that PMC, rather than past performance, provides more informational value about managerial efforts. Ultimately, this study contributes to the literature by identifying PMC as a determinant of target ratcheting.

Unintended consequences of punishment: Adverse effects of environmental penalties on green patents

We find that manufacturing firms that have received high environmental penalties experience significant declines in subsequent green patenting activity. We further use a difference-in-differences strategy exploiting the passage of 1990 Clean Air Act Amendment (1990 CAAA) as a shock to environmental regulatory stringency and show that the increase in regulatory stringency is linked to decreases in corporate green innovation. The adverse effect of environmental penalties on green innovation is stronger in firms with greater business uncertainty, higher product market competition, higher institutional ownership, and weaker financial conditions. Overall, the empirical evidence is consistent with the view that environmental penalties prompt firms to manage their risk exposure by reducing green innovation activity.

Shhh… Do Gender-Diverse Boards Prioritize Product Market Concerns Over Capital Market Incentives?

We examine whether gender-diverse boards prioritize product market concerns over capital market incentives when proprietary costs are high. We argue that gender-diverse boards protect their firm’s competitive edge and maximize long-term shareholder wealth by ethically and carefully maintaining the confidentiality of proprietary information. Due to the reduced disclosure of proprietary information, firms with gender-diverse boards are likely to face more adverse selection when proprietary costs are high. However, the reduced disclosure of proprietary information enables firms with gender-diverse boards to enhance and maintain their competitive edge and gain higher long-term returns. Using a matched sample of the United States-listed companies, we find that firms with gender-diverse boards, relative to similar firms with all-male boards, (1) are associated with higher adverse selection costs and (2) higher long-run stock returns when the firm faces high product market competition. Collectively, our results suggest that firms with gender-diverse boards, which initially experience higher adverse selection in a competitive environment, are rewarded with a net gain of about 10 percent of their stock price in three years. Our research contributes to the literature by highlighting the importance of board gender diversity in fostering the ethical redaction of proprietary information for proprietary cost-based motives as opposed to agency cost-based motives. Our findings have important implications for regulators, firms, and shareholders by identifying gender-diverse boards as an antecedent for the ethical redaction of proprietary information.

How Do Higher Educated Employees Affect Firms’ Investment Efficiency in China?

ABSTRACT China’s higher education expansion increases firms’ human capital input in terms of the number of educated employees, while its quality undergoes questioning. It is unknown what employees with higher education bring to the firm in China. Considering that investment decision is one of the most important drivers of firm value, we examine how employees with higher education affect firms’ investment efficiency in this paper. We document that the number of employees with higher education increases by 89% from 2008 to 2021. We further find that more employees with higher education are associated with higher investment efficiency through mitigating over- and underinvestment. This association is stronger for firms with high product market competition, low customer concentration, state-owned enterprises, and high senior manager education. Collectively, the results suggest that the information inputs channel, monitoring channel and up-and-down communications channel are likely underlying mechanisms through which higher educated employees affect firms’ investment decisions. Overall, our paper sheds light on the real effect of higher educated employees on firms’ investment efficiency.

Inventor CEO and technology M&A

This study examines the effect of inventor CEO on firm's technology acquisition and finds robust evidence that CEOs with hands-on innovation experience are associated with more technology acquisition. We utilize plausibly exogenous CEO turnovers to address the causal effects of inventor CEOs on corporate financial strategy such as acquisition. The effect is more pronounced in firms which CEOs have stronger power or previous acquisition experience, firms with high ownership concentration or non-state-owned firms, firms in high-tech industry or with high product market competition. Our study further shows that inventor CEOs prefer cash payment in technology acquisition and achieve higher premiums. The acquirer's future innovation output has been significantly improved after acquisition. Overall, this study contributes to the emerging literature on executives's personal unique characteristics on corporate mergers and acquisitions.

Product market competition and organization capital

This study examines the impact of product market competition on a firm’s investment in organization capital using a sample of Korean, listed firms during 2001–2020. As the high product market competition provides firms with incentives to build competitive advantages and increase productivity, we hypothesize that increases in product market competition drive firms to invest in organization capital. We found a positive relationship between product market competition and a firm’s investment in organization capital. We also found that such a relationship is more pronounced for firms in the high-tech industry and financially distressed firms.

Strategic deviation and investment inefficiency

We examine the association between strategic deviation and investment inefficiency. We conceptualize strategic deviation as the extent to which the pattern of a firm’s resource allocation deviates from its industry peers. We posit that firms pursuing deviant strategies are prone to increased information asymmetry and hence, are able to engage in self-serving behaviour as manifested in inefficient investments. Our results suggest that deviant firms have sub-optimal investments. A battery of robustness tests validates our findings. We further provide evidence to suggest that weaker monitoring, high product market competition and a low-quality information environment moderate the relation between strategic deviation and investment inefficiency. JEL Classification: M41, G41

Can innovation help existing firms resist shock from new stock issuance? Evidence from the launch of China’s STAR market

ABSTRACT The launch of China’s STAR market (officially known as the Science and Technology Innovation Board of Shanghai Stock Exchange) caused a significant drop in stock prices in existing stock markets in the Shanghai and Shenzhen stock exchanges. This study examines whether innovative firms showed more resilience to the shock caused by the launch of the STAR market. Using a sample of Chinese A-share listed firms, we find that firms with higher innovation had significantly higher stock returns during the shock period. This suggests that the STAR market launch induced investors to pay more attention to firm innovation and prompted them to reward innovations to a greater extent. This finding remains intact after an array of robustness tests. Moreover, this effect was more pronounced in non-state-owned enterprises and firms with higher product market competition. Additional analyses suggest that investors prefer firms with higher quality of innovation. Overall, this study finds that innovation plays an important role in capital markets; that is, innovation helps firms resist shock from the issuance of new shares.

Testing the impact of sustainable environmental regulations on firm performance with mediating effect of product market competition: empirical evidence from Turkey.

Environmental challenges are increasingly becoming global issues due to the negatively induced effect of carbon dioxide on the natural climate and the well-being of human beings. Industrialisation has intensified the energy demand which brought the surge in the consumption of conventional non-renewable energy resources, including fossil fuels. Despite the overwhelming evidence of negative effects of utilising conventional energy on the atmosphere, there has been a steady rise in industrial production which has encouraged firms to adopt technological innovation. In this sense, many countries have developed various strategies, frameworks and regulations to reduce industrial-driven environmental degradation. Environmental-friendly compliant production technology can be an important substitute model to improve economic development. This study examines the relationship between environmental regulation and firm performance with mediating the impact of product market competition in Turkey. The study uses multi-sectoral firm-level Turkish data covering from 2004 to 2020 which was analysed via numerous methods that control for endogeneity bias. The results of generalised method of moment indicate a strong positive effect of sustainable environmental regulation (SER) on firm performance (FP). Moreover, after mediating the effect of product market competition by decomposing the firms into low product market competition (LPMC) and high product market competition (HPMC), finding reveals a negative effect of SER on FP of LMPC whereas a positive impact was found in the HPMC firms. This finding shows that HPMC compels managers to form a differentiated profit maximisation strategy. In this sense, competition can play a dedicated role in enhancing firm performance in the context of government deliberate strategies and regulations for control of the industrial negative effect on the environment. The industrial sector needs to switch from conventional energy practices to sourcing green and renewable energy that would not jeopardise the environmental quality.

Acquisition for innovations? M&A intensity and intra-firm innovation reallocations

We investigate how M&A activities are used to allocate innovation resources within firm boundaries. We find that Chinese listed firms exhibit strong intra-firm innovation reallocation behaviors following M&A activities from 2007 to 2017. Specifically, they shift innovation activities to subsidiary firms. The intra-firm innovation reallocation concentrates on major restructuring and related-party deals. In addition, firms in the decline stage of life cycles are more likely to use innovation reallocation behaviors after M&A. Further analysis shows that the innovation reallocation behaviors are more visible in firms with low financial constraints, high product market competition, and low productivity. Besides, the innovation reallocation is value-enhancing for listed firms in general. Our findings highlight the intra-firm innovation reallocation as an effective innovation strategy.

Does CEO Power Backfire? The Impact of CEO Power on Corporate Strategic Change

In today’s dynamic economic environment, enterprises must maintain sensitivity and flexibility when responding to the market through continuous strategic change. Anchored in the approach–inhibition theory of power, this study explores the relationship between CEO power and corporate strategic change and examines the moderating effects of company underperformance and product market competition. The study uses data from all A-share listed companies in China during 2006–2017. The results indicate that first, there is an inverted U-shaped relationship between CEO power and corporate strategic change. Appropriate centralization of CEO power helps promote corporate strategic change, whereas excessive centralization hinders strategic change. Second, low underperformance strengthens the inverted U-shaped relationship between CEO power and strategic change. Finally, high product market competition strengthens the inverted U-shaped relationship between CEO power and strategic change.

The value of intangible capital transfer in mergers

We find that the value is created for acquirer shareholders in the mergers involving intangible capital transfer from targets to bidders; such value creation is positive and significant in the transfer of off-balance-sheet intangible capital and organizational capital as opposed to that of knowledge capital. Because the combined returns for bidders and targets are increasing in intangible capital transfer (while those of targets remain unaffected), we believe that the market perceives such transfers potentially create synergy. The market reaction to intangible capital transfer is positive and significant for bidders facing high-product market competition, in non-diversifying deals, and for high-tech combinations.

Can Major Government Customers Improve Corporate Total Factor Productivity

The government is provided with macro-control function in the market that can affect corporate resource allocation and economic efficiency through administrative or economic policies. A large number of studies have explored the impacts of government industrial policies, subsidies and other direct interventional economic measures on corporate total factor productivity. However, it lacks the understanding of government procurement, an economic tool that uses market procurement mechanisms to exert governance effects on companies. Few studies have noticed that the government can act as a customer to guide and support suppliers’ production and operation through market procurement, which helps to promote corporate innovation and improve production efficiency.This paper verifies the role and internal mechanism of major government customers in promoting corporate total factor productivity based on Chinese listed companies’ voluntarily disclosed data of major government customers in 2008—2017. This paper finds that: Major government customers can significantly improve suppliers’ total factor productivity. The effects of major government customers on corporate total factor productivity are more prominent in customers with higher government governance efficiency and higher government level, and in companies with larger technological distances and higher product market competition. The mechanism analysis shows that major government customers promote total factor productivity by improving corporate innovation investment and resource allocation efficiency.The contributions of this paper are as follows: First, from the perspective of government as a major corporate customer, this paper expands the research on government functions and confirms the effectiveness of market-oriented governance tools. Second, this paper supplements the empirical evidence of corporate total factor productivity incentives from the perspective of supply chain and verifies the positive effect of major government customers on corporate economic efficiency. Besides, it has noticed the discrepancy of governance effects under different government characteristics or corporate characteristics, which enriches studies on the relationship between government and enterprise. Third, this paper reveals the internal mechanism of major government customers on corporate total factor productivity and deepens the understanding of how government customers affect corporate behaviors. It has some implications for policy-makers and analysts. At first, listed companies should attach importance to the positive governance effect of government customers on total factor productivity. Then, governments should focus on the conditions and mechanisms for government customers to play a positive role and improve government governance efficiency. Last but not least, both governments and listed companies should understand the relationship between government and market correctly, and promote the government to play a better role in the market.

Do firm boundaries matter? The impact of Chinese imports on US conglomerates

The purpose of this paper is to use China’s World Trade Organization accession as a quasi-natural experiment and examine whether conglomeration affects firmss’ ability to respond to a significant increase in competitive pressure. Conglomerate segments have higher sales growth and higher profitability than singlesegment firms, when they face intensified import competition. Conglomerates’ outperformance is not observed when the markets in which segments operate already have high product market competition. Overall, conglomeration encourages competitiveness, and internal resources are allocated to relatively competitive segments.

How Audit Quality Affects the Firm Performance with the Moderating Role of the Product Market Competition: Empirical Evidence from Pakistani Manufacturing Firms

Audit quality (AQ) is a crucial instrument for ensuring transparency and accountability in both the public and private sectors. If the AQ is responsible for the maximization or minimization of profit, then what are the circumstances that make these possible? In this study, we examined the role of the product market competition (PMC) in the relation between the AQ and firm performance (FP). The PMC on the manufacturing firms of Pakistan was divided into two categories—low product market competition (LPMC) and high product market competition (HPMC). This division was calculated using the Herfindahl–Hirschman index (HHI). Then, we used ordinary least squares (OLS), the fixed-effect model, and the generalized method of moment (GMM) to examine the role of PMC on the association between the AQ and FP. The results of the study revealed that the financial performance of firms was enhanced with the quality of the audit. Highly competitive firms demonstrated higher chances to capture the maximum profit and have a positive relationship with FP, while less competitive firms were negatively associated with FP. Furthermore, the HPMC played a vital role in boosting the profit of the firms. On one hand, the connection between the AQ and FP was positively affected by the HPMC. On the other hand, the connection between the AQ and FP was negatively affected by the LPMC. Thus, the findings of this investigation have various implications for owners, investors, shareholders, and governments. This study can help the governments of developing economies to enhance economic conditions by focusing on the industrial sector. This study also contributes to the literature by supporting the agency theory that PMC can mitigate the agency issue between owners and agents.

Does corporate social responsibility reduce financial distress risk?

This paper examines how corporate social responsibility (CSR) affects the level of financial distress risk (FDR). Using a sample of 1201 US-listed firms during 1991–2012, our results indicate that firms with higher CSR levels have lower FDR, suggesting that a better CSR performance makes firms more creditworthy and have better access to financing, which is rewarded with less financial defaults. This finding is robust to using alternative proxies of FDR, to controlling for potential endogeneity, and is mainly driven by the community, diversity, employee relations, and environmental dimensions of CSR. Moreover, this relationship is more prevalent in firms with strong governance mechanisms and high product market competition. It is also more exacerbated for less distressed firms and during non-crisis periods. Overall, our findings suggest that the adoption of CSR practices comes with less distress and default risks, likely leading to a more attractive corporate environment, better financial stability and more crisis-resilient economies.

Ownership concentration and stock returns: Evidence from family firms in India

Public family firms in India represent an interesting case of relatively high ownership concentration combined with high growth opportunities, less competitive product markets and less developed capital markets. Investigating the relationship between ownership concentration and stock market performance, our initial analysis indicates insignificant average abnormal stock returns at low levels of family holdings but weak positive performance at high levels of ownership in the full sample of family and non-family firms and the family subsample. These aggregate results appear robust to alternative metrics of abnormal performance, controls for founder, descendant, and outside CEOs. Further analysis of subsamples of less and more competitive product markets indicates that while the vast majority of family firms enjoying high growth opportunities in less competitive market environments exhibit poor performance at lower ownership levels, those firms with higher family holdings are associated with significantly positive abnormal returns. However, the relation between family ownership and firm valuation under high growth prospects becomes insignificant for a much smaller fraction of firms facing high product market competition. Overall, our results are consistent with the hypothesis that positive alignment of interest effects offset family entrenchment effects on firm performance at high levels of ownership concentration common in India where most firms face high growth opportunities and less product market competition. These results challenge the evidence in western developed economies marked by relatively weaker growth rates and stronger product market rivalry that the performance of family firms tends to decline at high ownership concentration due to entrenchment.