Cash Holdings Trends Influenced by Market Competitiveness: Evidence from the Chinese Stock Market

This study examines the relationship between market competition and cash holdings in the Chinese stock market from 2000 to 2019. By focusing on China as the research environment, we aim to shed light on how market competition influences a firm’s cash holdings, considering the evolving nature of product market rivalry in China’s changing economic landscape. Our empirical findings reveal that increased market competition stimulates higher levels of investment by enterprises, leading to a decrease in cash holdings as firms rely on internal funding for their investment activities. Consequently, the relationship between market competition and cash holdings follows an inverted U-shape, indicating a decline in cash holdings with greater market competition. Furthermore, our research demonstrates that the impact of market rivalry becomes more pronounced as cash holdings increase. State-owned enterprises benefit from reduced market competition, and firms with larger overall assets also experience a lesser impact. These findings have significant implications for managers, investors, and policymakers alike. Lastly, our study emphasizes the managerial implications of the uncertainty - R&D link, indicating that competition plays a crucial role in regulating this relationship, with specific dynamics varying depending on the size of the organization.