Role Of Product Market Competition Research Articles

Product market competition and corporate social responsibility activities: Perspectives from an emerging economy

This study examines the effect of product market competition on corporate social responsibility activities in an emerging economy. Contrary to the findings of previous papers in cases of developed countries, we empirically find that firms in more competitive product markets are less engaged in corporate social responsibility activities. Considering the disciplinary role of product market competition, this result implies that corporate social responsibility activities represent overinvestments by managers rather than a competitive strategy. Additionally, consistent with agency theory, this relationship is prominently observed in firms with high free cash flow and low managerial ownership. We also find the positive firm value relevance of corporate social responsibility activities is significantly reduced or even becomes negative in less competitive product markets. The overall results suggest that existing theories on corporate social responsibility activities in advanced countries may apply differently to emerging economies with less-developed capital markets and weak investor protection.

Product market competition and debt choice

Motivated by prior research on the informational and monitoring role of product market competition, we examine how competitive pressure affects firms' choice between bank debt and public debt. Using a sample of 3675 U.S. firms over the period 2001–2013, we find that competitive pressure from the product market leads firms to rely less on bank debt financing. In a natural experiment setting, we also find that there is a significant decrease in firm reliance on bank debt after large import tariff reductions. In additional analyses, we show that the effect of competitive pressure on debt choice is more pronounced for firms with greater exposure to competition, higher financial constraints, and weaker governance practices. Moreover, we find that product market competition is associated with long-term maturity debt. Taken together, our study generates the important insight that external governance pressure from the product market acts as an alternate governance mechanism for bank debt monitoring.

Does product market competition increase strike activity? Evidence from the UK

Although many studies have examined the effect of labour market characteristics, macroeconomic fluctuations and workplace-level factors on strike activity, much less is known about industry-level determinants of industrial conflict, and in particular the role of product market competition. I examine the effect of competition on strike activity using evidence from a natural experiment of policy reform, the introduction of cartel legislation in the UK in the late 1950s. My econometric analysis, which takes advantage of the fact that different industries were affected to varying degrees by cartel policy, establishes that both the number of strikes and the number of working days lost as a result of strikes increased significantly when competition intensified after the abolition of cartels. I propose an interpretation of these results with reference to theoretical models of bargaining with asymmetric information.

Product market competition and analyst following

In this study, we investigate the link between product market competition and the extent of a firm’s analyst following. Our research is motivated by prior studies on analyst coverage, as well as the literature pertaining to the informational and monitoring role of product market competition. Using a sample of 520 French listed firms over 2000–2013, we find support to the hypothesis that the number of analysts following a firm decreases with the intensification of competition. This result suggests that the disciplinary power of product market competition makes investors more confident that firms are well monitored, which reduces their incentives to seek additional private information produced by financial analysts. In short, our findings corroborate previous evidence that there is a substitution effect between competition and other external corporate governance mechanisms, especially analyst following. Our results also shed more light on how the quality of firms’ monitoring mechanisms and information environment is affected by the intensity of product market competition.

Modeling product market competition and reporting quality: the transitional economy of China

PurposeThe purpose of this paper is to examine the role of product market competition in shaping a firm’s reporting quality (RQ).Design/methodology/approachThis research uses an aggregate measure of a firm’s RQ, considering both the absolute level of discretionary accruals (DA) and the quality of accruals, using modified Jones model and Francis et al. (2005) accruals quality model, respectively. Whereas, the Herfindahl-Hirschman index and the Lerner index are used to measure product market competition. Further, this study considers the transitional economy of China and employs panel data estimation techniques for testing the hypothesized relationships.FindingsThis study finds that firms operating in more competitive industries are associated with higher RQ. This association still prevails when analysis is done using the component measures of RQ (i.e. the absolute level of DA and the quality of accruals). Overall, the empirical results provide evidence on the disciplining role of product market competition among Chinese firms.Practical implicationsGiven the complex governance structures and specific kind of agency problems in Chinese corporations, this study suggests that product market competition may play an external disciplining role to improve the corporate information environment.Originality/valueThis research explores the role of product market competition for a firm’s RQ in Chinese-listed companies, while the prior studies on the same topic are mostly from the developed countries.

Mergers in Innovative Industries: The Role of Product Market Competition

We study how competition affects innovation (and welfare) when firms compete both in the product market and in innovation development. This relationship is complex and may lead to scenarios in which a lessening of competition increases R&D and consumer welfare in the long run, which is in contrast to arguments provided by antitrust agencies in recent merger cases. We provide conditions for when a merger increases industry innovation and when evaluating mergers based on static price effects is aligned with a fully dynamic merger evaluation. These conditions are based on properties of the product market payoffs.

Business Strategy and Firm Performance: The Moderating Role of Product Market Competition

Despite the advanced knowledge on the importance of organizational strategy, empirical research present mixed results on the effect of strategic orientation on organizational performances. To address this conundrum, we operationalize the Miles and Snow (1978, 2003) business strategy typology by constructing a strategy index and explore the relation between strategy type (defenders, analyzers, and prospectors) and firm performance. We show consistent superior performance of defenders against analyzers and prospectors. However, as market concentration increases, the performance advantage of defenders declines, suggesting a moderating role of product market competition in the strategy-performance link. Using import tariff reductions in the U.S. manufacturing industries between 1974 and 2005 as exogenous shocks to product market competition, we conduct a difference-in-difference test and document a significant shift in strategic orientations as market competitiveness increases. These findings highlight the dynamic nature of business strategy and the importance of aligning business strategy with its environments.

Accounting for derivatives and risk management activities

Purpose – The lessons and merits of changes in the recognition and disclosure of derivative instruments and hedging activities are still debated and are a major policy issue. Prior studies provide mixed evidences on the economic consequences of mandatory derivative instruments ' recognition and disclosure. This paper aims to provide empirical evidence on the impact of mandatory derivative instruments ' recognition and disclosure on managers’ risk-management behavior. More importantly, this paper aims to investigate the role of product market competition on the impact of mandatory derivative instruments ' recognition and disclosure on managers’ risk-management behavior. Design/methodology/approach – This paper tests the author ' s hypotheses using the fixed-effects estimation technique, where it includes firm dummies in all the regressions. This approach enables to control for unobserved firm effects (fixed effects) on firms’ risk-management behavior that are assumed to be constant through time but vary across firms. Findings – The author finds that mandatory recognition and disclosure of derivative instruments and hedging activities, on average, decreases firms’ market rate risk exposure. This finding suggests that after the implementation of the recognition and disclosure of derivative instruments and hedging activities required by Statement of Financial Accounting Standards No. 133 (SFAS 133), firms engage in more prudent risk-management activities to mitigate the potential cost of earnings volatility imposed by the standard. However, the decrease in market rate risk exposure is lower when the level of product market competition is higher. This finding is consistent with the idea that the recognition and disclosure of derivative instruments and hedging activities required by SFAS 133 unintentionally forces firms in competitive industries to engage in significant risk-taking. The result suggests that more disclosure in risk management may change risk-management incentives in undesirable ways if firms face the threat of entry in their product markets. Practical/implications – The results provide a new understanding on the role of product market competition on the effectiveness of mandatory derivative instruments ' recognition and disclosure. The findings imply that standard setters should take product market competition into consideration before making derivative instruments and hedging activities ' recognition and disclosure mandatory for all firms. Originality/value – The paper contributes to the accounting literature by providing a new insight into the moderating role of product market competition in the accounting recognition and disclosure regulation and firms’ reporting behavior relation. Moreover, the paper extends the current literature on the effects of SFAS 133 on risk-management activities and sheds light on the impact of accounting regulations on firms’ real economic behavior.

Corporate social responsibility, market competition, and shareholder wealth

ABSTRACTThis paper examines the association between corporate social responsibility (CSR), product market competition (PMC) and shareholder wealth by analysing CSR and market data from January 2006 to December 2012 (excluding 2009) in Korea. We focus on the role of PMC, which has been ignored in previous studies of CSR. Our empirical analyses indicate that PMC plays a significant role in explaining the relationship between a firm’s CSR activity and its stock returns. More specifically, we find that CSR activities significantly increase stock returns when PMC is low. This result implies that when competition is low, the effect of CSR is consistent with the stakeholder value maximisation theory.

Product market competition and CEO pay among Nigerian listed non-financial firms

The role of product market competition in shaping corporate executive contracts has been well debated in the literature. While there is an overwhelming evidence of a positive impact of competition on executive contracts, its empirical verification however remains largely limited to developed countries. This issue is taken up in Nigeria by investigating 63 listed non-financial firms over a period of 13 years. Product market competition was measured by inverse of price-cost margin while a system generalised methods of moments (SGMM) was adopted in the analysis of the data. Our model enables us to control for (dynamic) endogeneity which was raised as an issue in a previous study. Executive pay was measured as the salary of the highest paid director and total directors pay divided by the number of directors. Our results show that product market competition had a positive but not significant impact on executive contracts in Nigeria. Hence, the notion that competition played a positive and significant role in shaping executive contracts may not hold water. We may not be sure whether our result was due to the fact that it was carried out in a developing country with poor institutions or whether previous studies from developed markets did not utilise appropriate estimation technique such as GMM in treating dynamic endogeneity that is present in executive pay.

Product market competition and CEO pay among Nigerian listed non-financial firms

The role of product market competition in shaping corporate executive contracts has been well debated in the literature. While there is an overwhelming evidence of a positive impact of competition on executive contracts, its empirical verification however remains largely limited to developed countries. This issue is taken up in Nigeria by investigating 63 listed non-financial firms over a period of 13 years. Product market competition was measured by inverse of price-cost margin while a system generalised methods of moments (SGMM) was adopted in the analysis of the data. Our model enables us to control for (dynamic) endogeneity which was raised as an issue in a previous study. Executive pay was measured as the salary of the highest paid director and total directors pay divided by the number of directors. Our results show that product market competition had a positive but not significant impact on executive contracts in Nigeria. Hence, the notion that competition played a positive and significant role in shaping executive contracts may not hold water. We may not be sure whether our result was due to the fact that it was carried out in a developing country with poor institutions or whether previous studies from developed markets did not utilise appropriate estimation technique such as GMM in treating dynamic endogeneity that is present in executive pay.

The politics of infrastructure investment: The role of product market competition

In spatial competition, public infrastructure plays a crucial role in determining product market outcomes. In our model, consideration of infrastructure's impact on the product market drives the preferences of consumers in their dual role as voter/taxpayers. The spatial heterogeneity of consumers produces conflicting political interests and in many cases inefficient outcomes. However across both exogenous and endogenous market environments product market competition consistently leads to higher levels of publicly funded infrastructure than monopoly/collusion. Furthermore, competition's boost to the popular support for infrastructure investment is often excessive while monopoly leads to underinvestment.

Product market competition and corporate investment decisions

Purpose – The study aims to examine the association between product market competition and corporate investment decisions on, particularly, risk-taking and investment efficiency. Existing theoretical studies on whether product market competition mitigates or exacerbates agency problems are inconclusive. Prior research generally finds that competition constrains management opportunism in reporting operating performance. However, the association between product market competition and managerial investment decisions has largely been unexplored. Design/methodology/approach – The primary measure of product market competition is the Herfindahl–Hirschman Index. The authors use regression analysis to examine the association between corporate risk-taking and over-investment of free cash flow (FCF) (as dependent variables) and product market competition (as an independent variable). Findings – Using firm-year observations from 1990 to 2010, the authors find that competition encourages managers to invest in risky investment. They also find that competition disciplines management on its use of FCFs. Overall, their results provide support for the disciplining role of product market competition in management investment decisions. The results are robust after they control for shareholder activism and executive compensations. Originality/value – The paper contributes to the literature by providing evidence of the disciplining role of product market competition in management investment decisions. First, the results suggest that competition encourages managers to invest in risky investment. One potential explanation for the results is that competition reduces opportunities for resource diversion for management personal benefits and, in turn, decreases management risk aversion. Another explanation is that competition forces management to take more risks for the long-term survival of the company. Second, the results indicate that competition disciplines management on its use of FCFs. Although firms in highly competitive industries make investment decisions that are less conservative, they tend to avoid suboptimal investment decisions, such as over-investment of FCF, compared to their counterparts.

Canada–US productivity gap: The role of competition intensity differential

The relative lack of competitive pressure in product markets and lower investment in both fundamental and applied innovation are among the potential factors that have been put forward to explain Canada’s weak productivity performance with respect to the US. Since competition is generally seen as the single leading catalyst for fundamental and applied innovation, this paper analyzes the role of product market competition in the Canada–US productivity level gap. We develop an empirical framework in which competition exerts both direct and indirect effects on productivity, with the indirect impact coming through fundamental and applied innovation. We find statistically significant evidence that the competition intensity differential (between Canada and the US) has contributed to the Canada–US productivity level gap directly, as well as indirectly through lower investment in both R&D activities and M&E (including ICT) investment. We also find statistically significant evidence that Canada’s relatively poor performance in both productivity and M&E (including ICT) investment have acted as a self-reinforcing mechanism, which further causes detriment to the country’s productivity.

New Directions in Strategic Factor Market Research: Processes and Mechanisms

The concept of strategic factor markets is a fundamental element of resource-based theories of competitive advantage. Barney’s (1986) article, which introduced the strategic factor market (SFM) concept, provided seminal insights on the origins of heterogeneous resource positions and subsequent research has made great strides studying the role of information in SFMs. Yet, aspects of SFM activity remain under-explored. This symposium highlights research that builds on and supplements the perspectives taken in prior work. In the session, Jay Barney provides the context for the research to be presented with comments on his 1986 article and the subsequent scholarship that has developed his ideas. The new research presents (1) a conceptual process model that that bridges buying resources in strategic factor markets with building resources through internal accumulation, (2) a formal analytical model of SFM activity that introduces competitive dynamics and seller-side considerations to offer several insights into the role of product market competition in factor markets, and (3) an empirical study that takes a knowledge-based perspective to explore how firms can derive superior ex ante resource valuations in the presence of symmetrical information. Taken together, the three papers provide diverse but complementary new perspectives on the role of SFMs in resource-based theories of strategy. Following the presentations, Jay Barney provides discussant comments on the papers and concludes with additional thoughts on the future of SFM research. Strategic Factor Market Processes: Buying and Building Resources Presenter: Catherine A Maritan; Syracuse U. Presenter: Thomas P. Moliterno; U. of Massachusetts, Amherst How Do Strategic Factor Markets Respond to Rivalry in the Product Market? Presenter: Olivier Chatain; U. of Pennsylvania Knowledge Asymmetries in Strategic Factor Markets Presenter: Rory Eckardt; U. of Massachusetts

Price effects of the euro cash changeover: the role of product market competition

The euro cash changeover that took place in 2002 in 12 countries of the European Economic and Monetary Union was associated with abnormal price increases in most member countries. This paper investigates the influence of product market competition on the size of the changeover-related prices hikes, showing that the price hikes were less prevalent in countries with a higher level of competition. For the countries that are to join the euro area in coming years, this means that fostering competition can help contain changeover-related price increases. This aspect is of particular importance for the most recent and next wave of euro adopters, because of their rather heavy product market regulation as measured by the OECD, which are likely to restrain competition. The results indicate that comprehensive reform efforts can be more beneficial in containing changeover-related price hikes than a selective easing of product market regulation in a subset of areas.