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Finance and Product Market Competition

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Loews Philadelphia, Commonwealth Hall A1
Hosted By: American Finance Association
  • Chair: Jose Azar, IESE Business School

Ownership, Governance and Investment

German Gutierrez
,
New York University
Thomas Philippon
,
New York University

Abstract

The US business sector has under-invested relative to Tobin's Q since the early 2000s; and the under-investment appears to be explained by decreasing competition (due to both increasing concentration and common ownership) and tight or short-termist governance [Gutiérrez and Philippon, 2016]. In this paper, we use a combination of natural experiments and instrumental variables to establish a causal relationship between increased quasi-indexer institutional ownership and decreased investment. In particular, we use the Russell index threshold as a natural experiment, and lagged quasi-indexer ownership as an IV. We find that higher quasi-indexer ownership leads to higher buybacks and less investment. We then study the interaction between governance and competition in causing under-investment and find contrasting results. At the firm-level, governance matters most for firms in non-competitive industries: they tend to buyback more shares and invest less. At the industry-level, anti-competitive effects of common ownership disproportionately affect industries that 'appear' competitive according to traditional
measures but actually are not (due to common ownership).

Anti-collusion Enforcement: Justice for Consumers and Equity for Firms

Sudipto Dasgupta
,
Lancaster University
Alminas Zaldokas
,
Hong Kong University of Science and Technology

Abstract

We consider the case of changing competition that comes from stronger antitrust enforcement around the world to show that as the equilibrium switches from collusion to oligopolistic competition, firms respond by stepping up equity issuance and increasing investment. As a result, debt ratios fall. These results imply the importance of financial flexibility in surviving competitive threats. Our identification relies on difference-in-difference estimation based on a staggered passage of leniency laws in 63 countries around the world over 1990-2012.

Cash, Financial Flexibility, and Product Prices: Evidence From a Natural Experiment in the Airline Industry

Sehoon Kim
,
University of Florida

Abstract

Corporate cash holdings and rivalry networks jointly impact firms' product pricing strategies. Exploiting the Aviation Investment and Reform Act of the 21st Century as a quasi-natural experiment to identify exogenous shocks to competition in the airline industry, I find that firms with more cash than their rivals respond to intensified competition by pricing more aggressively, primarily when there is less concern of rival retaliation. Financially flexible firms based on alternative measures respond similarly. Moreover, cash-rich firms that face less market overlap with rivals experience greater market share gains and long-term profitability growth. The results highlight the importance of strategic interdependencies across firms in the effective use of flexibility provided by cash.
Discussant(s)
Mireia Gine
,
University of Navarra & University of Pennsylvania
Judith A. Chevalier
,
Yale University
Nancy Rose
,
Massachusetts Institute of Technology
JEL Classifications
  • G3 - Corporate Finance and Governance