International Review of Financial Analysis 82 (2022) 102163

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International Review of Financial Analysis

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The effect of market competition on corporate cash holdings: An analysis of

corporate innovation and financial constraint
Xiang Zhang a, Han Zhou b, *
a
School of Accounting, Chongqing University of Technology, Chongqing 400054, China
b
School of Finance, Nanjing University of Finance and Economics, Nanjing 210023, China

A R T I C L E I N F O A B S T R A C T

JEL classification: This study investigates the impact of market competition on corporate cash holdings. Specifically, we focus on
G15 the corporate innovation and financial constraint channels. Based on a sample of the Chinese stock market from
G32 1998 to 2019, our empirical results show that cash holdings are negatively impacted by market competition,
G34
corporate innovation partially mediates this effect, and financial constraint exhibits full mediation. Moreover,
Keywords: the mediating effect of corporate innovation is moderated by financial constraints. Furthermore, the impact of
Market competition
market competition reveals an increasing trend as cash holdings increase with quantile regression. In addition,
Cash holdings
Chinese stock market
this impact is mitigated for state-owned enterprises, and firms with larger total assets are impacted to a lesser
Corporate innovation degree.
Financial constraints

1. Introduction
There is a growing body of literature on the theme of cash holdings,
and previous research shows that the growing trend of corporate cash
holdings originates from the following four motives: tax, transaction,
precaution, and agency problems (Bates, Kahle, & Stulz, 2009; Opler,
Pinkowitz, Stulz, & Williamson, 1999). Several recent studies have
focused on macroeconomic factors such as economic policy uncertainty
(Demir & Ersan, 2017; Phan, Nguyen, Nguiyen, & Hegde, 2019; Xu,
Chen, Xu, & Chan, 2016), oil price uncertainty (Zhang, Zhang, & Zhou,
2020), grabbing hand effects (Caprio, Faccio, & Mcconnell, 2013; Fan,
Titman, & Twite, 2012; Frye & Shleifer, 1997); and government quality
(Chen, Li, Xiao, & Zou, 2014; Kusnadi, Yang, & Zhou, 2015; Xie &
Zhang, 2020), among others.
In addition to these macroeconomic factors, the impact of market
competition is studied extensively. Haushalter, Klasa, and Maxwell
(2007) build a link between industry concentration and cash holdings of
manufacturing firms through interdependent growth opportunity
channels, showing that corporate cash holdings decrease with market
competition because cash holdings can be used for risk management.
They argue that firms with higher interdependence growth opportu­
nities with rivals face greater predation risk and that interdependence is
more significant for more concentrated industries. Consequently, firms
in less competitive markets tend to hold more cash to mitigate predation
risk.
As the second largest economy globally, China’s economic issues
have drawn significant attention. Chinese economic reforms started in
1978, with the principal objective of relaxing government regulation,
accelerating market liberalization, and building a market-based price
system and economy. Based on these economic reforms, China’s econ­
omy has expanded over the last 30 years. Even though product market
competition (PMC) remains restrictive, most industries have market-
based price systems (Conway, Herd, Chalaux, He, & Yu, 2010). China
is experiencing reforms, and market competition differs from that of the
U.S.; thus, other channels exist through which cash holdings are
impacted.
From the perspective of corporate innovation, at the early stage of
economic reforms, the technologies are imported directly because the
R&D capability of Chinese firms is relatively weak. With the develop­
ment of the Chinese economy, market competition is enhanced, Chinese
firms start to invest in R&D, and cash holdings provide a crucial source
of funds. Consequently, cash holdings and market competition are
tightly linked through corporate innovation channels in China. In
addition, from the perspective of financial constraints, market compe­
tition is negatively correlated with firms’ profitability (Schumpeter,
1950). Moreover, the flow of external funds is associated with the

* Corresponding author.
E-mail address: 9120181113@nufe.edu.cn (H. Zhou).

https://doi.org/10.1016/j.irfa.2022.102163
Received 14 November 2021; Received in revised form 11 March 2022; Accepted 15 April 2022
Available online 20 April 2022
1057-5219/© 2022 Elsevier Inc. All rights reserved.
X. Zhang and H. Zhou
profitability of firms; in other words, funds move to industries that are
less competitive and firms in concentrated industries are less financially
constrained, which further impacts the cash holdings of firms. Accord­
ingly, market competition impacts cash holdings through financial
constraint channels. Therefore, in this study, we investigate both the
corporate innovation channel and the financial constraint channel.
It is vital to understand the influential mechanism of market
competition on corporate cash holdings. On one hand, evidence shows
that market competition stimulates innovation, and consequently R&D
investment will increase (Geroski, 1990; Nickell, 1996). Aghion, Bloom,
Blundell, Griffith, and Howitt (2005) document an escape competition
effect to explain the impact of market competition on innovation; to
escape from competition, neck-and-neck firms tend to innovate as R&D
expenditure increases with market competition (Aghion, Reenen, &
Zingales, 2013; Hashmi, 2013). Furthermore, cash holdings can be used
as a buffer to smooth R&D spending since R&D faces large adjustment
costs (Brown & Petersen, 2011; Chung, 2017; Li & Luo, 2020). There­
fore, an increase in R&D demand will cause companies to increase their
cash holdings to smooth future R&D expenditures. On the other hand,
the Schumpeterian hypothesis (Schumpeter, 1950) claims that monop­
oly is associated with high profits, and profit decreases with market
competition. Because firms in competitive markets are generally smaller
and less profitable, it is more difficult for them to access the capital
market and be externally funded (Bernini & Montagnoli, 2017; Petersen
& Rajan, 1994, 1995). Consequently, firms in more competitive (less-
concentrated) industries face higher financial constraints. Firms facing
high levels of financial constraints tend to spend more internal funds and
thus their cash holdings decrease (Agca & Mozumdar, 2008; Gilchrist &
Himmelberg, 1995; Rungsomboon, 2005). It can be seen that the
corporate innovation channel and the financial constraint channel have
opposite effects. Moreover, if the financial constraint effect holds, the
buffer effect of R&D smoothing will be lower. This paper attempts to
investigate these two channels, and it provides a better understanding of
how corporate cash holdings are impacted by market competition.
Our results show that both corporate innovation and financial
constraint channels exist. From the perspective of corporate innovation
channels, empirical results reveal that corporate innovation increases
with market competition, and cash holdings increase with corporate
innovation as well. Moreover, the direct effect of market competition on
cash holdings is significant; thus, corporate innovation shows a partial
mediation effect. However, the direct effect is negative, as opposed to
the positive indirect effect of market competition on cash holdings
through corporate innovation channels, indicating that the mediation
effect of corporate innovation is competitive. In terms of the financial
constraint channel, the financial constraints of firms increase with
market competition, and cash holdings decrease with financial con­
straints, which shows that the indirect effect of market competition on
cash holdings through financial constraint channels is negative. The
direct effect of market competition on cash holdings is insignificant;
thus, financial constraints exhibit a full mediation effect. We further
study the interaction between these channels, and the results reveal that
the mediation effect of corporate innovation is moderated by financial
constraints. Our findings provide an important policy implication: to
maintain the R&D smoothing, policy makers should pay more attention
to reducing the financial constraints faced by firms.
This study contributes to the current literature in the following ways.
First, based on the economic reforms in China, we study the impact of
market competition on cash holdings by investigating the corporate
innovation and financial constraint channels, which are not examined in
current studies. For example, Haushalter et al. (2007) study the inter­
dependent growth opportunities channel with manufacturing firms in
the U.S., whereas our investigation covers a full sample of the Chinese
stock market. Second, to further study the relationship between these
two channels, we investigate the moderating effect of financial con­
straints on the mediation of corporate innovation. Our results show that
the mediation effect of corporate innovation is moderated by financial
2
International Review of Financial Analysis 82 (2022) 102163
constraints. Our findings reveal a crucial policy implication: corporate
innovation increases with market competition and then cash holdings
will increase to smooth future R&D expenses. However, this R&D
smoothing effect will be attenuated if firms face high financial con­
straints. As a result, with the reforms of market structure, policy makers
should also maintain the ability of firms to secure external funding to
enhance the R&D smoothing effect. Third, using a panel data quantile
regression model, we study whether the impact of competition changes
with different levels of cash holdings. As a mean regression only in­
dicates the linear relation, the quantile regression provides more com­
plete information. Finally, firms’ heterogeneity is considered. Since
there are several state-owned enterprises (SOEs) in the Chinese stock
market, which comprises our sample, we include four different stock
exchanges wherein the total assets of listed firms of each stock exchange
differ. Thus, we investigate whether the impact of competition on cash
holdings changes for firms with different total assets and ownership
structures.
The remainder of this study is organized as follows. Section 2 pro­
vides a brief review of the literature. Section 3 describes the measure­
ments of the variables and model specifications. Section 4 presents the
data and analyzes the empirical results. Section 5 provides the robust­
ness checks of our model. Finally, Section 6 concludes the study.
2. Literature review and hypotheses development
2.1. PMC and innovation
Research on PMC and innovation is traceable to Schumpeter (1950),
who asserts that short-term restrictions on competition can stimulate
and protect innovation, while perfect competition is not suitable for
innovation. In line with the “Schumpeterian effect,” Grossman and
Helpman (1993) believe that the fiercer the competition, the greater the
possibility that innovations will be imitated or replaced. Thus, the net
income obtained through innovation is reduced, and the enterprise’s
innovation enthusiasm is reduced. Contrary to the “Schumpeterian ef­
fect,” a positive correlation between PMC and innovation is detected in
many empirical analyses (Blundell, Griffith, & Reenen, 1999; Geroski,
1995; Nickell, 1996).
Aghion et al. (2005) develop a theoretical model that delivers an
inverted-U prediction between PMC and innovation. They explain the
positive effect of PMC on innovation by the “escape competition effect,”
which means that enhancing competition will prompt companies to
adopt efficiency-oriented behaviors and stimulate companies to form
competitive advantages in price, cost, or product differentiation through
innovation. Moreover, this positive effect is more pronounced in coun­
tries with better patent protection (Aghion et al., 2013). Following
Aghion et al. (2005) and Aghion et al. (2013), Askenazy, Cahn, and Irac
(2013) consider firm size and by using the data of French firms they find
that competition impacts firm decisions to a lesser extent for small firms
or when the relative cost of innovation in firms’ sectors is high. Hashmi
(2013) asserts that the U.K. manufacturing industries are technologi­
cally more comparable than their counterparts in the U.S. Therefore, the
U.S. sample is more inclined to the explanation of the “Schumpeterian
effect.” Mulkay (2019) finds that for most French firms, there is a
negative effect of competition on innovation, and the effect seems to be
slightly stronger for product innovation as compared to process
innovation.
2.2. Market competition and corporate cash holdings
Research on corporate cash holdings mainly relies on trade-off the­
ory (Kraus & Litzenberger, 1973), agency theory (Jensen, 1986), and
pecking order theory (Myers & Majluf, 1984), starting with the moti­
vations of cash holdings, including transaction motives, prevention
motives, investment motives, and tax avoidance motives (Bates et al.,
2009; Opler et al., 1999). Scholars conduct research on corporate cash
X. Zhang and H. Zhou
holdings at the macro and firm levels. At the macro level, scholars study
the impact of the economic cycle (Chen, Jia, & Sun, 2016), political
uncertainty (Xu et al., 2016), monetary policy (Adão & Silva, 2020), oil
price uncertainty (Zhang et al., 2020) and economic policy uncertainty
(Goodell, Mcgee, & Mcgroarty, 2020) on cash holdings. From a firm-
level perspective, scholars consider the ownership of the company
(Chen, El Ghoul, Guedhami, & Nash, 2018), corporate governance
(Dittmar & Mahrt-Smith, 2007), internal control (Chen, Feng, & Li,
2020), and research and development (Begenau & Palazzo, 2021) as the
determinants of corporate cash holdings.
Beginning with Haushalter et al. (2007), researchers increasingly
focus on the impact of PMC on corporate cash holdings. Haushalter et al.
(2007) show that market competition has a positive impact on cash
holdings, and this effect is stronger when the interdependence of a firm’s
investment opportunities with rivals is higher. Moreover, firms tend to
hold more cash when they are closer to the technological core of the
industry. Fresard (2010) shows that firms with higher cash reserves
perform significantly better in future market share gains when the
product market is more competitive. By using product market fluidity as
a proxy for product market threats, Hoberg, Phillips, and Prabhala
(2014) show that PMC decreases firms’ propensity to make payouts via
dividends or repurchases and increases the cash held by firms, especially
for firms with relatively less access to financial markets. Lyandres and
Palazzo (2016) theoretically and empirically verify that a change in a
firm’s cash holdings has a negative effect on its rivals’ cash holdings, and
this negative effect is strengthened with an increase in future PMC.
Atanasova and Li (2018) show that market competition is the driving
force in determining the relationship between diversification and cash
holdings. They find that diversified firms do not hold a significantly
lesser amount of cash as compared to focused firms in highly competi­
tive markets, which differs from the findings of current studies.
2.3. Corporate cash holdings and innovation
Hall and Lerner (2010) assert that R&D firms, regardless of whether
they are startup or large R&D firms, prefer to use internally generated
funds for financing investment, which is in line with the pecking order
theory. Brown and Petersen (2011) directly examine whether firms use
cash reserves to smooth their R&D expenditures. They find that firms
that are most likely to face financing frictions extensively rely on cash
holdings to smooth R&D. Qiu & Wan, 2015 show that technology
spillovers positively affect corporate cash holdings, and the effect is
more pronounced among financially constrained firms and firms that are
likely to benefit more from diffused technology. He and Wintoki (2016)
show that R&D investment accounts for a significant portion of the in­
crease in the average cash-to-assets ratio of U.S. firms within the sample
period of 2008 to 2012. Chung (2017) shows that Korean firms mainly
relied on external financing before the 2008 financial crisis; however,
they used cash reserves to smooth R&D expenditure during the post-
crisis period. Baldi and Bodmer (2018) find that changes in R&D in­
vestment have a positive effect on changes in cash holdings in European
countries. This effect tends to be stronger for country groups charac­
terized by a high level of innovative capacity as compared to countries
with moderate levels of innovative capacity. Li and Luo (2020) find that
firms in healthcare and technology industries largely save cash from
share issuance proceeds for their R&D spending owing to the intensity of
industry competition, which drives the increase in cash holdings of U.S.
firms. By employing a parsimonious industry equilibrium model, Gao
and Zhao (2022) show that innovation uncertainty matters the most for
the observed strong cash saving demand, followed by knowledge spill­
over and financial frictions.
To our knowledge, prior studies rarely establish a link between
competition and cash holdings in the case of China, which is crucial
because China is experiencing a transition in the product market envi­
ronment. Moreover, we provide evidence on the corporate innovation
and financial constraint effects, which have been largely overlooked in
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International Review of Financial Analysis 82 (2022) 102163
previous literature. Using the panel data quantile regression model, we
show a more complete picture of the impact of competition on different
levels of cash holdings. Furthermore, based on the features of the Chi­
nese stock market, we investigate the impact of a firm’s total assets and
state ownership on the effect of market competition on corporate cash
holdings.
2.4. Hypotheses development
Schumpeter (1950) states that monopoly is the best engine for
corporate innovation because the latter is driven by high profits; thus,
innovation decreases with market competition. However, Geroski
(1990) challenges the popular Schumpeterian hypothesis, with empir­
ical results reveal that, with several different measures of monopoly
power, market concentration reduces innovation, and consequently,
R&D expenditure is lower. Nickell (1996) finds that competition im­
proves corporate performance, which is explained by the positive cor­
relation between market competition and R&D expenditure.
By developing a theoretical model, Aghion et al. (2005) explain the
positive effect of PMC on innovation by the “escape competition effect.”
Specifically, since neck-and-neck firms are encouraged to innovate, R&D
investments increase. Moreover, this positive effect is more pronounced
in countries with better patent protection (Aghion et al., 2013). The
same results are found for the U.K. manufacturing industries (Hashmi,
2013).
Contrary to Schumpeter’s (1950) view, after the restructuring of
SOEs in 1998, the actual situation of Chinese enterprises is in line with
the “escape competition effect.” Before 1998, Chinese SOEs operated
monopolistically, with low efficiency and insufficient innovation capa­
bilities. With the continuous deepening of the reform of SOEs, the status
of enterprises of various ownership types tends to be equal, and fierce
competition promotes corporate innovation.
Furthermore, pecking order theory (Myers & Majluf, 1984) shows
that firms finance their investment in R&D primarily with their own
earnings, and they require external financing when internal financing is
insufficient. Hence, a firm’s cash holdings increase with corporate
innovation. Several studies provide evidence on pecking order theory,
that is, R&D firms generally tend to finance their investments through
internal funds (Brown & Petersen, 2011; Hall & Lerner, 2010). More­
over, Korean firms use cash reserves to smooth R&D expenditure during
the post-crisis period (Chung, 2017), and the same results are found for
firms in the healthcare and technology industries (Li & Luo, 2020).
Therefore, an increase in R&D demand will cause companies to increase
their cash holdings to smooth future R&D expenditures.
Based on the discussion above, we propose the following hypothesis:
H1. : Market competition stimulates corporate innovation, and cash
holdings increase with corporate innovation.
One important assertion of the Schumpeterian hypothesis (Schum­
peter, 1950) is that monopoly is associated with high profits, and profit
decreases with market competition. Before the reforms, most industries
in China were dominated by SOEs, and firms’ profits are higher when
markets are less competitive. With the reforms of corporate ownership
and the reduction of entry barriers, market competition is enhanced in
some industries, and profits decrease. The negative correlation between
profit and industry concentration is widely used to measure market
competition, which is referred to as the Lerner index.
The difference in profit across different industries significantly af­
fects the extent of financial constraints faced by firms. There are two
main reasons for this. First, firms in concentrated industries are gener­
ally larger, making it is easier for them to access the capital market
(Bernini & Montagnoli, 2017; Petersen & Rajan, 1994, 1995), and they
have less need for external funds to innovate (Bernini & Montagnoli,
2017; Geroski, 1990), thus, they are less financially constrained. Second,
in a frictionless economy, external funds generally flow to the most
profitable industries (Bernini & Montagnoli, 2017; Bernini & Weiss,
X. Zhang and H. Zhou
1981). Consequently, firms in less-concentrated industries face higher
financial constraints.
When firms are more financially constrained, the following two ef­
fects may occur. First, since it is difficult for firms to be externally fun­
ded, they spend more of their own funds for normal operations, and thus
their cash reserves are lowered. Second, there is an indirect effect such
that the more financial constraint a firm has, the lower its corporate
investment (Agca & Mozumdar, 2008; Gilchrist & Himmelberg, 1995;
Rungsomboon, 2005). Thus, the need for funds in financially con­
strained firms is reduced, which further reduces the cash holdings of
these firms.
Based on the discussion above, we propose the following hypothesis:
H2. : Firms’ financial constraints increase with market competition,
and cash holdings decrease with financial constraints.
If the corporate innovation effect dominates, then cash holdings will
decrease with market competition. However, if the financial constraint
effect dominates, the cash holdings will increase with market
competition.
3. Measurement of variables and model specification
3.1. Cash holdings
The dependent variable in our model is cash holdings. Following the
general specification (Bates et al., 2009; Feng & Rao, 2018; Liu & Mauer,
2011; Opler et al., 1999; Xu et al., 2016), the cash-to-net assets ratio is
used in this study, which is defined as the ratio of cash and marketable
securities to net assets, wherein the latter is the difference between total
assets and the sum of cash and marketable securities.
3.2. PMC
The measure of PMC, which is widely used in the literature, is the
Herfindahl-Hirschman Index (HHI), which is defined as the sum of
squared market shares:
∑Nj
HHI jt = S2 (1)
j=1 ijt
where Sijt denotes the market share of firm i in industry j in year t, and Nj
represents the number of firms in industry j. Higher HHI indicates higher
market concentration, thus less market competition.
3.3. Model specification
∑ Since larger firms are less risky, they are likely to hold less cash,
CASH it = β0 + β1 HHI jt− 1 + βk CONTROLkit + εit (2)
k
where, CASH refers to cash holdings and HHI denotes market competi­
tion in industry j for firm i and year t. CONTROL represents a set of
control variables. ε is the unobserved random error. Additionally, a
firm’s investment behavior financed by cash reserves may cause market
competition to change (Haushalter et al., 2007). Thus, to alleviate the
possible endogeneity problem between market competition and cash
holdings, the lagged measures of market competition are applied as
instruments in our model.
Following the specification of Bates et al. (2009), firms’ cash flow
(CF) is included because firms’ cash holdings increase with cash flow.
When leverage is constraining, firms will choose cash to reduce
leverage; thus, leverage (LEV) is expected to be negatively correlated
with cash holdings. Then, a dummy of dividend payment (DIV) is
included; firms that pay dividends are less risky and can access the
capital market more easily; consequently, these firms are less driven by
precautionary motives. Since net working capital (NWC) comprises as­
sets substitutable for cash, NWC is included as well. Assets created by
4
International Review of Financial Analysis 82 (2022) 102163
capital expenditure (CAPEX) increase the capability for external
financing, and firms with higher CAPEX are less motivated to hold cash.
The SIZE of firms is controlled as well, which is defined as the natural
logarithm of firms’ sales. Since the borrowing cost for larger firms is
lower, they are less constrained by external finance; thus, cash reserves
of larger firms are likely to decrease (Farinha, Mateus, & Soares, 2018;
Opler et al., 1999). The market-to-book ratio (MB) is included to capture
firms’ growth opportunities (Bates et al., 2009; Ozkan & Ozkan, 2004;
Podolski, Truong, & Veeraraghavan, 2016). Finally, the profitability of
firms (ROA) is controlled.
4. Data and empirical results
4.1. Data
Our sample contains annual data from 1998 to 2019 because cash
flow data in China were recorded starting in 1998. The data are
extracted from the China Stock Market and Accounting Research data­
base (CSMAR). Our sample contains firms from the Shanghai Stock
Exchange, Shenzhen Stock Exchange, Small and Medium Enterprise
Board, and Growth Enterprise Market. The financial sector industry is
excluded from the sample. Our dataset is reduced to unbalanced panel
data due to missing observations owing to the incomplete datasets of
some firms. The data are winsorized at the 1% and 99% levels.
Table 1 shows the detailed definitions of all the variables. Table 2
presents the summary statistics of all variables. On average, firms hold
19% of their net assets in cash and marketable securities. The market
competition takes an average of 0.03 with a standard deviation of 0.05.
Table 3 reports the Pearson correlation coefficients for the variables. In
general, the results reveal no multicollinearity.
4.2. The impact of market competition on cash holdings
Table 4 presents the results for the impact of market competition on
firms’ cash holdings. Column 1 presents the regression of cash holdings
on market competition without any control variables included, and year-
and industry-fixed effects are controlled for. Column 2 presents the re­
sults of the pooled regression with all control variables included.
Additionally, the year fixed effect is added to Column 3. Both year and
industry fixed effects are controlled for in Column 4.
The empirical results show that market competition has a significant
negative impact on firms’ cash holdings at the 1% level. The estimation
results of Column 4 indicate that an increase of one unit in the HHI
causes an estimated increase of 8.59% in cash holdings relative to an
average cash holding of 19%.
which is consistent with Farinha et al. (2018). Similar to Opler et al.
(1999) and Xu et al. (2016), our findings show that firms with higher CF
tend to hold more cash. Moreover, profitability exhibits a positive cor­
relation with cash holdings; in other words, firms hold more cash when
they earn more. Our results provide evidence that firms that pay
Table 1
Definitions of the variables.
Variables Definition
CASH Ratio of cash and marketable securities to net assets
HHI Herfindahl-Hirschman Index, defined in Eq. (1)
Total assets minus total equity plus market value of equity over total
MB
assets
LEV Total liabilities divided by total assets
NWC Net working capital minus cash to total assets
CAPEX Capital expenditures to total assets
SIZE Natural logarithm of total sales
AGE
Natural logarithm of the number of years since the incorporation of the
firm
ROA Return on assets of firms for each quarter
X. Zhang and H. Zhou International Review of Financial Analysis 82 (2022) 102163

Table 2
Descriptive statistics of the variables.
N Mean SD Skewness Kurtosis P25 P50 P75 Min Max

CASH 39,395 0.186 0.141 1.422 4.893 0.087 0.146 0.243 0.008 0.684
HHI 39,398 0.027 0.047 3.099 13.724 0.003 0.006 0.031 0.002 0.278
CF 39,391 0.047 0.075 − 0.108 4.112 0.006 0.046 0.089 − 0.190 0.261
NWC 39,394 0.014 0.214 − 0.300 3.445 − 0.116 0.020 0.154 − 0.650 0.522
CAPEX 39,385 − 0.064 0.096 0.881 59.662 − 0.102 − 0.049 − 0.012 − 1.202 3.344
MB 38,089 0.645 0.234 − 0.170 2.238 0.471 0.657 0.828 0.132 1.116
LEV 39,212 0.444 0.215 0.363 2.951 0.280 0.437 0.595 0.053 1.148
ROA 39,395 0.037 0.065 − 1.734 10.771 0.015 0.038 0.067 − 0.284 0.204
SIZE 39,395 21.791 1.302 0.675 3.445 20.859 21.633 22.536 19.061 25.742
DIV 39,398 0.110 0.163 2.761 12.696 0.000 0.050 0.150 0.000 1.000

Table 3
Pearson correlation coefficients of the variables.
CASH HHI CF NWC CAPEX MB LEV ROA SIZE DIV

CASH 1
HHI − 0.004 1
CF 0.137*** 0.043*** 1
NWC 0.108*** − 0.122*** − 0.157*** 1
CAPEX 0.036*** − 0.009* − 0.207*** − 0.051*** 1
MB − 0.176*** 0.059*** − 0.070*** − 0.173*** 0.008 1
LEV − 0.409*** 0.072*** − 0.146*** − 0.592*** 0.150*** 0.292*** 1
ROA 0.273*** − 0.001 0.335*** 0.272*** − 0.158*** − 0.156*** − 0.404*** 1
SIZE − 0.168*** 0.102*** 0.064*** − 0.146*** − 0.012** 0.442*** 0.315*** 0.041*** 1
DIV 0.275*** − 0.017*** 0.276*** 0.138*** − 0.146*** − 0.033*** − 0.228*** 0.437*** 0.164*** 1

Note: *** indicates significance at the 1% level, ** indicates significance at the 5% level, and * indicates significance at the 10% level.

SIZE is negative; thus, larger firms tend to hold less cash. The result for
Table 4 CAPEX is positive, and the result for MB is not statistically significant in
Results of the impact of market competition on corporate cash holdings.
our model.
1 2 3 4

Lag HHI 0.109*** 0.053*** 0.041*** 0.086*** 4.3. Corporate innovation channel and financial constraint channel
(0.028) (0.013) (0.013) (0.025)
CF 0.011 0.035*** 0.064***
(0.010) (0.010) (0.010) This subsection distinguishes the impact mechanisms of the corpo­
NWC − 0.115*** − 0.115*** − 0.150*** rate innovation and financial constraint channels. To test the mediation,
(0.004) (0.004) (0.004) the three-step regression procedures, originally presented by Sobel
CAPEX 0.195*** 0.194*** 0.182*** (1982) and Baron and Kenny (1986), are widely used to assess the extent
(0.007) (0.007) (0.007)
MB − 0.033*** − 0.019*** − 0.002
to which the effect of the independent variable on the dependent vari­
(0.003) (0.004) (0.004) able is direct or indirect via the mediator. The structural equation
LEV − 0.248*** − 0.238*** − 0.269*** modeling approach (SEM) is introduced by Sobel (1987) and Iacobucci,
(0.004) (0.004) (0.004) Saldanha, and Deng (2007); the SEM technique is the superior method
ROA 0.181*** 0.182*** 0.177***
on both theoretical and empirical statistical grounds. Iacobucci et al.
(0.012) (0.012) (0.012)
SIZE − 0.004*** − 0.009*** − 0.008*** (2007) show that SEM features greater precision in terms of lower
(0.001) (0.001) (0.001) standard errors, and SEM is consistently more efficient in detecting
DIV 0.130*** 0.127*** 0.126*** mediation in the population. Therefore, the SEM technique is used in
(0.005) (0.004) (0.004) this study, and the maximum likelihood method is employed in the
Constant 0.108*** 0.397*** 0.423*** 0.375***
(0.007) (0.011) (0.014) (0.014)
estimation procedure.
Year FE Yes No Yes Yes We follow Zhao Jr, and J.G.L., Chen, Q. (2010) and Jose (2013) to
Industry FE Yes No No Yes construct our mediation testing process. Fig. 1 illustrates the mediation
No. of Obs. 36,002 34,979 34,979 34,979
R2 0.103 0.223 0.254 0.309

Note: Dependent variable: CASH. Mediating

*** indicates significance at the 1% level, ** indicates significance at the 5% Variable
level, and * indicates significance at the 10% level. Standard errors are reported (MV)
in parentheses.
a b
dividends hold more cash, which challenges the findings of Bates et al.
(2009) and Farinha et al. (2018). This difference may be because firms in
the U.S. pay more cash dividends, while firms in China pay more stock Market
c' Cash
dividends. The coefficients of NWC and LEV are negative; these results Competition Holdings
are in line with those of Bates et al. (2009). NWC can be considered a (HHI) (CASH)
substitute for cash; thus, a higher NWC induces lower cash holdings.
When facing high leverage, firms use cash to lower leverage; thus,
leverage and cash holdings are negatively correlated. The coefficient of Fig. 1. The Direct and Indirect Influence Paths of Market Competition on
Cash Holdings.

5
X. Zhang and H. Zhou International Review of Financial Analysis 82 (2022) 102163

Table 5A firms’ financial constraints (Jiang, Qi, & Tang, 2017; Kaplan & Zingales,
Estimation results of the SEM. 1997; Lamont, Polk, & Saa-Requejo, 2001). Data on R&D expenses are
Corporate innovation Financial constraint extracted from the CSMAR database. Table 5A presents the estimation
results of the SEM; Columns 1 and 2 present the estimation results of the
Dependent variable RD CASH FC CASH
corporate innovation channel, and Columns 3 and 4 report the results for
1 2 3 4 the financial constraint channel. The year- and industry-fixed effects are
RD 0.454*** controlled for in all specifications.
(0.019) The estimation results in Columns 1 and 2 of Table 5A show that the
FC − 0.122***
coefficient of Lag HHI is significantly negative, and the coefficient of RD
(0.000)
Lag HHI − 0.048*** 0.108*** − 0.585*** 0.013 is significantly positive. Table 5B shows that the standardized indirect
(0.007) (0.024) (0.167) (0.014) effect coefficient of corporate innovation (a×b) equals − 0.008, which is
CF − 0.016*** 0.071*** − 12.366*** − 1.451*** significant according to the results of the Monte Carlo z-test. However,
(0.003) (0.009) (0.062) (0.007) the direct effect coefficient (c’) is significantly positive, which points in
NWC 0.007*** − 0.153*** 0.739*** − 0.059***
(0.001) (0.004) (0.027) (0.002)
the opposite direction of a×b, indicating that the mediation of corporate
CAPEX − 0.028*** 0.194*** − 0.744*** 0.090*** innovation is competitive. Specifically, market competition has a posi­
(0.002) (0.007) (0.045) (0.004) tive impact on corporate innovation, and cash holdings increase with
MB − 0.024*** 0.009** − 2.821*** − 0.346*** corporate innovation, which is consistent with H1. Moreover, the results
(0.001) (0.004) (0.025) (0.002)
show that the mediation is partial and competitive; numerically,
LEV − 0.031*** − 0.255*** 5.859*** 0.445***
(0.001) (0.004) (0.029) (0.003) approximately 25% (0.008/0.032) of the effect of market competition
ROA − 0.039*** 0.194*** − 0.982*** 0.062*** on cash holdings is mediated by corporate innovation.
(0.003) (0.011) (0.078) (0.006) The estimation results in Columns 3 and 4 of Table 5A show that the
SIZE 0.000* − 0.008*** 0.061*** 0.000 coefficients of both Lag HHI and FC are significantly negative. Table 5B
(0.000) (0.001) (0.005) (0.000)
DIV − 0.002 0.127*** − 4.992*** − 0.487***
shows that the standardized indirect effect coefficient of financial
(0.001) (0.004) (0.029) (0.003) constraint (a×b) is 0.026, which is significant according to the results of
Constant 0.014*** 0.368*** 0.387*** 0.415*** the Monte Carlo z-test. However, the direct effect coefficient (c’) is not
(0.004) (0.014) (0.095) (0.008) significant, indicating that the mediation effect of financial constraint is
Year & Industry FE Yes/Yes Yes/Yes Yes/Yes Yes/Yes
full mediation. Specifically, firms’ financial constraints increase with
No. of Obs. 34,979 34,979 34,979 34,979
R2 0.417 0.320 0.879 0.788 market competition, and cash holdings decrease with financial con­
straints; the findings are consistent with H2.
Note: *** indicates significance at the 1% level, ** indicates significance at the
Overall, market competition impacts corporate cash holdings mainly
5% level, and * indicates significance at the 10% level. Standard errors are re­
through the corporate innovation channel and the financial constraint
ported in parentheses.
channel. More specifically, market competition stimulates corporate
innovation, and cash holdings increase with corporate innovation.
testing process. Market competition, proxied by HHI, could directly
Moreover, firms’ financial constraints increase with market competi­
affect corporate cash holdings or indirectly affect it through a mediating
tion, and cash holdings decrease with financial constraints. As a result,
variable. We employ SEM to estimate a, b, and c’. The model settings are
these two channels show opposite effects. Furthermore, as Baron and
as follows:
Kenny (1986) and Sobel (1987) state, the mediation effect is reflected by
∑
MV it = α0 + aHHI jt− 1 + αk CONTROLkit + εit1 (3) the indirect effect reported in Table 5B. It can be seen that the mediation
k effect of the financing constraint channel is 3.25 (0.026/0/008) times
∑ that of the innovation channel. Therefore, the mediation of corporate
(4) innovation is competitive, and the mediation of financial constraints
′
CASH it = β0 + bMV it + c HHI jt− 1 + βk CONTROLkit + εit2
k dominates.
MVit indicates the mediating variables in the equations; in our study, ∑
RDit = α0 + α1 HHI jt− 1 + α2 FCit + α3 HHI jt− 1 *FCit + αk CONTROLkit + εit1
MVit could be either financial constraint or corporate innovation. Ac­ k
cording to the coefficients, a and b, and their respective standard errors, (5)
the Monte Carlo method is used to generate random normal distribu­
tions of a, b, and a×b. We run a z-test to verify whether a×b is signifi­

∑
CASH it = β0 + β1 RDit + β2 HHI jt− 1 + β3 FCit + β4 HHI jt− 1 *FCit + βk CONTROLkit + εit2 (6)
k

cant. If neither a×b nor c’ is significant, then there is no mediation

effect. If a×b is not significant and c’ is significant, then there is no
mediation effect. If a×b is significant and c’ is not significant, then there Table 5B
is a full mediation effect. If both a×b and c’ are significant and point in Standardized indirect, direct, and total effects.
the same direction, then there is a complementary mediation effect. If
Indirect effect Direct effect Total effect
both a×b and c’ are significant and point in the opposite direction, then
there is competitive mediation. Corporate innovation − 0.008 0.040 0.032
(0.000) (0.000) (0.000)
To measure corporate innovation, we use R&D expenses scaled by
Financial constraint 0.026 0.005 0.031
total assets, which is a measure widely applied in the literature (Fang, (0.000) (0.356) (0.000)
Lerner, & Wu, 2017; Tian & Wang, 2014; Ting, Wang, Yang, & Tuan,
Note: P-values in the parentheses are calculated from Monte Carlo z-test with
2021). Moreover, the widely used KZ index is employed to measure
5000 Monte Carlo replications.

6
X. Zhang and H. Zhou International Review of Financial Analysis 82 (2022) 102163

(0.05) to higher quantiles (0.95).

∑ The results reported in Table 7 show that the impact of market
RDit = α0 + α1 HHI jt− 1 + α k
k CONTROLit + εit1 (7) competition varies based on different levels of cash holdings.The co­
efficients of the lower levels are initially negative, and later become
k

∑
CASH it = β0 + β1 RDit + β2 HHI jt− 1 + β3 FCit + β4 RDit *FCit + βk CONTROLkit + εit2 (8)
k

Market competition could stimulate corporate innovation due to the

Financial
“escape competition effect” (Aghion et al., 2005), and an increasing constraint
demand for corporate innovation forces companies to increase cash
holdings to smooth R&D investment. The mediation effect of corporate
innovation can be moderated by financial constraints in two ways. First,
the increase in financing constraints faced by a firm strengthens the
“escape competition effect.” The combination of fierce market compe­
Cash
tition and high financing constraints can double the risk of corporate Market Corporate
competition innovation holdings
failure. To survive, firms must speed up their escape from competition
by increasing their R&D investment. Second, an increase in financial
constraints could decrease the positive effect of R&D investment on Fig. 3. The impact of financial constraint on the relationship between corpo­
corporate cash holdings. Financially constrained firms will have more rate innovation and cash holdings.
difficulty in investing and finding external funds (Agca & Mozumdar,
2008; Angelopoulou & Gibson, 2007; Guariglia, 1999). For the sake of Table 6
functioning normally, or at least surviving, firms cannot hold too much Results of the moderated mediation.
cash for smoothing R&D investment. The impact of FC on HHI and The impact of FC on RD and
According to the above analysis, there are two types of moderated RD CASH
mediations that require testing: the impact of financial constraints on
Dependent variable RD CASH FC CASH
the relationship between market competition and corporate innovation,
and the impact of financial constraints on the relationship between 1 2 3 4

corporate innovation and cash holdings, as illustrated in Figs. 2 and 3, Lag HHI*FC − 0.006*** 0.008**
respectively. Following Preacher, Zyphur, and Zhang (2010), we employ (0.002) (0.003)
RD*FC − 0.019***
Eq. (5) to (8) to test the moderated mediation effects. Table 6 reports the
(0.004)
empirical results; Columns 1 and 2 present the results of the moderated RD 0.141*** 0.150***
mediation shown in Fig. 2, and Columns 3 and 4 report the results of the (0.011) (0.011)
moderated mediation shown in Fig. 3. The coefficients of the interaction Lag HHI − 0.043*** 0.011 − 0.049*** 0.019
(0.007) (0.014) (0.007) (0.014)
terms in Columns 1 and 4 are both significantly negative, which means
FC − 0.004*** − 0.122*** − 0.121***
that the mediation effect of corporate innovation is moderated by (0.000) (0.000) (0.000)
financial constraints. CF − 0.067*** − 1.441*** − 0.016*** − 1.437***
(0.004) (0.007) (0.003) (0.007)
NWC 0.011*** − 0.060*** 0.007*** − 0.060***
4.4. Further analysis (0.001) (0.002) (0.001) (0.002)
CAPEX − 0.031*** 0.095*** − 0.028*** 0.095***
4.4.1. Quantile regression (0.002) (0.004) (0.002) (0.004)
Table 4 shows the results of the mean regression of the impact of MB − 0.036*** − 0.341*** − 0.024*** − 0.341***
(0.001) (0.002) (0.001) (0.002)
market competition on cash holdings, which indicates that, on average,
LEV − 0.007*** 0.445*** − 0.032*** 0.444***
firms’ cash holdings decrease with market competition. However, it is (0.002) (0.003) (0.001) (0.004)
important to understand the effect of market competition on different ROA − 0.042*** 0.068*** − 0.038*** 0.068***
levels of cash holdings. The quantile regression provides a more (0.003) (0.006) (0.003) (0.006)
comprehensive picture. In this section, we use quantile regression to SIZE 0.001*** 0.000 0.000* 0.000
(0.000) (0.000) (0.000) (0.000)
investigate this effect. We estimate seven quantiles, from the lower DIV − 0.023*** − 0.484*** − 0.002* − 0.484***
(0.002) (0.003) (0.001) (0.003)
Constant 0.015*** 0.413*** 0.013*** 0.409***
Financial (0.004) (0.008) (0.004) (0.008)
constraint Year & Industry FE Yes/Yes Yes/Yes Yes/Yes Yes/Yes
No. of Obs. 34,979 34,979 34,979 34,979
R2 0.423 0.789 0.879 0.789

Note: Columns 1 and 2 present the impact of financial constraint on the relationship
between market competition and corporate innovation, and Columns 3 and 4 report
Cash
Market Corporate the impact of financial constraint on the relationship between corporate innovation
competition innovation holdings and cash holdings.
*** indicates significance at the 1% level, ** indicates significance at the 5%
Fig. 2. The impact of financial constraint on the relationship between market level, and * indicates significance at the 10% level. Standard errors are reported
competition and corporate innovation. in parentheses.

7
X. Zhang and H. Zhou International Review of Financial Analysis 82 (2022) 102163

Table 7
Results of the impact of market competition on cash holdings with quantile regression.
q05 q10 q25 q50 q75 q90 q95

Lag HHI -0.065*** 0.021** − 0.022*** − 0.010** 0.124*** 0.300*** 0.446***

(0.003) (0.010) (0.001) (0.004) (0.000) (0.001) (0.024)
CF 0.006*** 0.022*** 0.073*** 0.100*** 0.065*** 0.063*** 0.126***
(0.001) (0.001) (0.001) (0.009) (0.003) (0.000) (0.005)
NWC − 0.003*** − 0.023*** − 0.024*** − 0.059*** − 0.146*** − 0.213*** − 0.292***
(0.001) (0.002) (0.000) (0.007) (0.001) (0.000) (0.019)
CAPEX 0.009*** 0.017*** 0.037*** 0.155*** 0.195*** 0.300*** 0.186***
(0.001) (0.002) (0.001) (0.009) (0.004) (0.001) (0.016)
MB − 0.012*** − 0.017*** − 0.025*** − 0.034*** − 0.046*** − 0.051*** 0.025***
(0.001) (0.003) (0.000) (0.004) (0.000) (0.000) (0.006)
LEV − 0.036*** − 0.055*** − 0.089*** − 0.175*** − 0.309*** − 0.449*** − 0.524***
(0.001) (0.001) (0.000) (0.006) (0.000) (0.000) (0.005)
ROA 0.048*** 0.092*** 0.089*** 0.131*** 0.152*** 0.145*** 0.117**
(0.003) (0.006) (0.001) (0.026) (0.005) (0.001) (0.0457)
SIZE 0.002*** 0.002*** 0.005*** − 0.001 0.006*** − 0.001*** − 0.012***
(0.000) (0.000) (0.000) (0.001) (0.000) (0.000) (0.001)
DIV 0.036*** 0.046*** 0.082*** 0.138*** 0.143*** 0.206*** 0.144***
(0.000) (0.002) (0.000) (0.015) (0.002) (0.000) (0.003)

Note: Dependent variable: CASH. We estimate a quantile regression model for panel data with nonadditive fixed effects. Adaptive MCMC optimization technique is
applied, 1000 draws are performed, and 100 draws are dropped as a burn-in period. Acceptance rate is set to 0.5.
*** indicates significance at the 1% level, ** indicates significance at the 5% level, and * indicates significance at the 10% level. Standard errors are reported in
parentheses.

positive. It is notable that at a low level of cash holdings, an increase in

Table 8
market competition will lead firms to hold more cash. However, this
Results of the interaction effects of market competition with STATE and ASSET.
impact becomes negative as the level of cash holdings increases. More­
over, there is an increasing trend in the impact of market competition, 1 2 3 4

which shows that the impact of competition increases as the level of cash Lag HHI* STATE − 0.132*** − 0.101***
holdings increases. A possible explanation is that when firms’ cash re­ (0.027) (0.026)
STATE − 0.012*** 0.004**
serves are relatively low, firms choose to hold more cash, facing
(0.002) (0.002)
increasing market competition due to precautionary motives. Since in­ Lag HHI*ASSET − 0.084*** − 0.030***
vestment is risky and costly for firms with low levels of cash, they choose (0.008) (0.009)
not to invest, and their cash holdings increase. In contrast, when firms ASSET − 0.051*** − 0.048***
hold a large amount of cash, the increase in market competition leads (0.002) (0.002)
Lag HHI 0.113*** 0.124*** 1.913*** 0.753***
them to invest more because it is less risky and costly for cash-rich firms;
(0.016) (0.027) (0.181) (0.187)
thus, cash holdings decrease. Furthermore, the more cash held by firms, CF 0.015 0.064*** 0.051*** 0.098***
the less risky is the investment. Hence, the impact of market competition (0.009) (0.009) (0.010) (0.009)
on corporate cash holdings exhibits an increasing trend. NWC − 0.117*** − 0.149*** − 0.113*** − 0.148***
(0.004) (0.004) (0.004) (0.004)
CAPEX 0.195*** 0.181*** 0.238*** 0.221***
4.4.2. Firm size and ownership structure (0.007) (0.007) (0.007) (0.007)
To explore whether the effect of market competition on cash hold­ MB − 0.026*** − 0.000 − 0.031*** − 0.005
ings differs with varying firm size and nature, we study the interaction (0.003) (0.004) (0.003) (0.004)
effects of market competition with the total assets and state-owned LEV − 0.251*** − 0.273*** − 0.261*** − 0.281***
(0.004) (0.004) (0.004) (0.004)
features of firms. In China, there are several SOEs, whose objectives
ROA 0.195*** 0.183*** 0.096*** 0.101***
are not only profit maximization but also social and political in nature. (0.012) (0.012) (0.012) (0.012)
Consequently, ownership is a specific feature of Chinese companies, SIZE − 0.005*** − 0.007*** 0.049*** 0.042***
which may lead to different reactions to market competition (Carpenter, (0.001) (0.001) (0.002) (0.002)
DIV 0.127*** 0.125*** 0.131*** 0.126***
Lu, & Whitelaw, 2021). In our sample, we include firms from four stock
(0.005) (0.004) (0.004) (0.004)
exchanges: the Shanghai Stock Exchange, Shenzhen Stock Exchange, Constant 0.403*** 0.367*** 0.347*** 0.360***
Small and Medium Enterprise Board, and Growth Enterprise Market. In (0.012) (0.014) (0.013) (0.015)
the Chinese stock market, the Shanghai Stock Exchange and Shenzhen Year & Industry FE No/No Yes/Yes No/No Yes/Yes
Stock Exchange are referred to as the “Main board.” Firms must meet the No. of Obs. 34,975 34,975 34,977 34,977
R2 0.227 0.310 0.238 0.320
highest requirements to be listed in both of these stock exchanges, thus
many traditional and large corporations are generally listed on the Main Note: Dependent variable: CASH. Columns 1 and 2 represent the interaction
board. The requirements of the Small and Medium Enterprise Board with STATE, and Columns 3 and 4 report the interaction with ASSET. The
(SME) are lower, and these boards are designed for small and medium estimation results of the pooled regressions are presented in Columns 1 and 3,
firms. Most firms listed in this stock exchange are from traditional in­ and year and industry fixed effects are added in Columns 2 and 4.
*** indicates significance at the 1% level, ** indicates significance at the 5%
dustries; thus, their total assets are very high but smaller than those on
level, and * indicates significance at the 10% level. Standard errors are reported
the Main board. Numerous firms from the information technology in­
in parentheses.
dustry are listed in the Growth Enterprise Market (GEM); these firms are
relatively smaller than firms on the Main board and SME board. As a
with lower total assets (Feng & Rao, 2018).
result, the total assets of firms in our sample account for the large dif­
To capture the interaction effects, we add interaction terms in the
ference. Furthermore, larger firms are generally less risky; thus, they are
regression model.
more motivated to invest as market competition increases. Conse­
quently, their responses to market competition differ from those of firms

8
X. Zhang and H. Zhou International Review of Financial Analysis 82 (2022) 102163

∑
Table 9 CASH it = λ0 + λ1 HHI jt− 1 + λ2 HHI jt− 1 *Zit + λk CONTROLkit + εit (9)
Results of other measures of market competition. k

(1) (2) (3)

where Z represents the total assets (ASSET) and state-owned feature
Lagged HHI 0.084*** (STATE) of firms, respectively.
(0.025)
Lagged PMC − 0.007***
Table 8 presents the empirical results. Our results show that the
(0.002) coefficients of the interaction terms are negative for both ASSET and
Lagged CR4 0.040*** STATE. These results coincide with our expectation that the impact of
(0.008) competition will be attenuated as firms become larger. As previously
CF 0.064*** 0.064*** 0.063***
argued, larger firms are less risky, thus they choose not to invest more
(0.009) (0.009) (0.009)
NWC − 0.149*** − 0.148*** − 0.149*** even when facing higher competition. The state-owned feature mitigates
(0.004) (0.004) (0.004) the impact of competition as well. Profit maximization may not be the
CAPEX 0.182*** 0.182*** 0.181*** priority of SOEs, and they are less sensitive to market conditions.
(0.007) (0.007) (0.007) Accordingly, they are less motivated to invest more.
MB 0.000 0.000 0.000
(0.004) (0.004) (0.004)
LEV − 0.273*** − 0.273*** − 0.273*** 5. Robustness check
(0.004) (0.004) (0.004)
ROA 0.183*** 0.182*** 0.182***
To assess the robustness of our model, two modifications are
(0.012) (0.012) (0.012)
SIZE − 0.007*** − 0.007*** − 0.007*** implemented. First, we employ two other measures as proxies for market
(0.001) (0.001) (0.001) competition: the number of firms in the industry (PMC) and the con­
DIV 0.124*** 0.124*** 0.124*** centration ratio of the four largest firms in the industry (CR4), both of
(0.004) (0.004) (0.004)
which are widely used in the current literature (Haushalter et al., 2007;
Constant 0.368*** 0.392*** 0.360***
(0.014) (0.015) (0.014) Huang & Lee, 2013; Jiang, Kim, Nofsinger, & Zhu, 2015). For the con­
Year & Industry FE Yes/Yes Yes/Yes Yes/Yes venience of comparison, we put the three regression results of the in­
No. of Obs. 34,979 34,979 34,979 dependent variables HHI, PMC, and CR4 in Table 9. The empirical
R2 0.309 0.310 0.310 evidence shows that higher PMC and lower CR4 reflect higher market
Note: Dependent variable: CASH. The year and industry fixed effects are competition. Consistent results are found for all three measures, which
controlled for all specifications. shows that cash holdings decrease with market competition.
*** indicates significance at the 1% level, ** indicates significance at the 5% Second, Raith (2003) and Karuna (2007) argue that industry con­
level, and * indicates significance at the 10% level. Standard errors are reported centration and market competition are negatively correlated when
in parentheses. market structure is exogenous; however, their relationship is unclear if
market structure is endogenously determined. As a result, to relieve the
endogeneity of measurement error, we replace the industry

Table 10
Results of the price cost margin.
Direct effect Corporate innovation Financial constraint

Dependent variable CASH RD CASH FC CASH

1 2 3 4 5
Lag Margin − 0.019*** 0.003*** − 0.020*** 0.078*** − 0.009***
(0.004) (0.001) (0.004) (0.029) (0.002)
RD 0.449***
(0.019)
FC − 0.123***
(0.000)
CF 0.063*** − 0.016*** 0.071*** − 12.330*** − 1.449***
(0.009) (0.003) (0.009) (0.062) (0.007)
NWC − 0.149*** 0.008*** − 0.152*** 0.739*** − 0.058***
(0.004) (0.001) (0.004) (0.027) (0.002)
CAPEX 0.181*** − 0.028*** 0.193*** − 0.741*** 0.090***
(0.007) (0.002) (0.007) (0.045) (0.004)
MB 0.000 − 0.024*** 0.011*** − 2.819*** − 0.345***
(0.004) (0.001) (0.004) (0.025) (0.003)
LEV − 0.273*** − 0.031*** − 0.259*** 5.850*** 0.444***
(0.004) (0.001 (0.004) (0.029) (0.004)
ROA 0.180*** − 0.038*** 0.197*** − 0.959*** 0.062***
(0.012) (0.003) (0.011) (0.078) (0.006)
SIZE − 0.007*** 0.000* − 0.007*** 0.061*** 0.000
(0.001) (0.000) (0.001) (0.005) (0.000)
DIV 0.130*** − 0.002 0.131*** − 5.250*** − 0.514***
(0.004) (0.001) (0.004) (0.030) (0.003)
Constant 0.392*** 0.007* 0.389*** 0.269*** 0.425***
(0.015 (0.004) (0.015) (0.099) (0.008)
Year & Industry FE Yes/Yes Yes/Yes Yes/Yes Yes/Yes Yes/Yes
No. of Obs. 34,979 34,979 34,979 34,979 34,979
R2 0.31 0.417 0.320 0.879 0.788

Note: Columns 1 presents the results of direct effect, Columns 2 and 3 show the results for corporate innovation channel, and the results for financial constraint channel
are reported in Columns 4 and 5. The year and industry fixed effects are controlled for all specifications.
*** indicates significance at the 1% level, ** indicates significance at the 5% level, and * indicates significance at the 10% level. Standard errors are reported in
parentheses.

9
X. Zhang and H. Zhou
concentration with the price cost margin to measure the market
competition. Following Aghion et al. (2005), Karuna (2007), and
Hashmi (2013), the price cost margin is defined as follows:
Njt
∑
Marginjt = 1 −
1
Lit (9)
Njt i=1
where j indicates the industry and i represents a firm in the industry, N is
the number of firms in the industry, L denotes the Lerner’s index which
is computed as:
Operating proitit − financial costit
Lit = (10)
salesit
The empirical results for the price cost margin are reported in
Table 10, the lagged measure of the price cost margin is applied as well.
Columns 1 presents the results of total effect, Columns 2 and 3 show the
results for corporate innovation channel, and the results for financial
constraint channel are reported in Columns 4 and 5. The coefficient of
the lagged margin in Column 1 is negative, and the higher margin in­
dicates greater competition; thus, cash holdings decrease with market
competition. Columns 2 and 3 show that the corporate innovation
channel is proved, and the financial constraint channel is confirmed by
Columns 4 and 5.
6. Conclusions
Haushalter et al. (2007) investigate the impact of industry concen­
tration on cash holdings, finding that firms in less competitive markets
tend to hold more cash due to the interdependent growth opportunities
channel. Since then, scholars are increasingly studying the impact of
market competition on corporate cash holdings and the underlying logic
(Atanasova & Li, 2018; Fresard, 2010; Hoberg et al., 2014; Lyandres &
Palazzo, 2016;). As a complement to extant research, based on the
economic reforms in China, this study attempts to investigate two other
channels: the corporate innovation channel and the financial constraint
channel.
This study provides evidence on these two channels by using a
sample from the Chinese stock market. Specifically, corporate innova­
tion increases with market competition, and cash holdings increase with
corporate innovation. However, the total effect is negative; thus, the
mediation effect of corporate innovation is competitive. Moreover, in
terms of the financial constraint channel, financial constraints increase
with market competition, and cash holdings decrease with financial
constraints. The results indicate a full mediation effect of financial
constraints; the financial constraint channel dominates the mediation
effect of corporate innovation. Furthermore, we find that the impact of
market competition exhibits an increasing trend as cash holdings in­
crease. In addition, the impact of competition is mitigated for SOEs, and
firms with larger total assets are less affected by market competition.
Author contributions
Xiang Zhang: Conceptualization, Methodology, Writing - Original
Draft.
Han Zhou: Resources, Software, Formal analysis, Validation, Writing
- Review & Editing, Supervision.
Declaration of Competing Interest
None.
Data availability
Data will be made available on request.
10
International Review of Financial Analysis 82 (2022) 102163
Acknowledgement
The authors would like to thank Professor Douglas Cumming for his
insightful comments. Zhang acknowledges the financial supports spon­
sored by Chongqing Social Science Planning Project (Grant No.
2021BS057) and Scientific Research Foundation of Chongqing Univer­
sity of Technology. Zhou acknowledges the financial supports sponsored
by the Jiangsu Natural Science Foundation (Grant No. BK20210668).
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