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Product market competition and the cost of equity capital: evidence from China

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  • Chen Chen
  • Li Li
  • Mary L.Z. Ma

Abstract

This study examines how product market competition affects the cost of equity capital in the incomplete competition and transitional economy setting in China, and reports that firms in more competitive industries have lower the cost of equity. We explain that technical innovation, production efficiency, external governance, and managerial incentives induced by increased competition reduce systematic economic uncertainty in China, and find their mediating effects on the competition cost of equity relation. We also find that better development of non-state economy, less government intervention, entrance to the World Trade Organization, and higher banking competition strengthen the competition cost of equity relation.

Suggested Citation

  • Chen Chen & Li Li & Mary L.Z. Ma, 2014. "Product market competition and the cost of equity capital: evidence from China," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(3), pages 227-261, September.
    • Handle: RePEc:taf:raaexx:v:21:y:2014:i:3:p:227-261
    DOI: 10.1080/16081625.2014.893197
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    References listed on IDEAS

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    1. Bazdresch, Santiago, 2011. "Product differentiation and systematic risk: theory and empirical evidence," MPRA Paper 35504, University Library of Munich, Germany, revised 01 Nov 2011.
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    Cited by:

    1. Majeed, Muhammad Ansar & Yan, Chao, 2021. "Financial statement comparability, state ownership, and the cost of debt: Evidence from China," Research in International Business and Finance, Elsevier, vol. 58(C).
    2. Yung, Kenneth & Nguyen, Trung, 2020. "Managerial ability, product market competition, and firm behavior," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 102-116.
    3. Jiang, Fuxiu & Kim, Kenneth A. & Nofsinger, John R. & Zhu, Bing, 2015. "Product market competition and corporate investment: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 196-210.
    4. Babar, Md. & Habib, Ahsan, 2021. "Product market competition in accounting, finance, and corporate governance: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 73(C).
    5. Chiu, Yen-Chen, 2020. "Macroeconomic uncertainty, information competition, and liquidity," Finance Research Letters, Elsevier, vol. 34(C).
    6. Zhou, Lu Jolly & Kong, Weimin & Li, Yunshen, 2023. "Cross-listing and predation risk in product markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    7. Xin Che & Stephen G. Fier & Andre P. Liebenberg, 2019. "The effect of predation risk on cash holdings: Empirical evidence from the U.S. property‐liability insurance industry," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(3), pages 329-358, September.
    8. Guo, Chun & Su, Wunhong & Song, Xiaobao & Hu, Xingxing, 2022. "Heterogeneous debt financing and environmental research & development: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 65-81.
    9. Li, Xiaoyu & Zou, Lin, 2024. "Does mandating narrative disclosure of innovation help unveil the curtain of R&D expenditure? Evidence from regulation change in China," International Review of Financial Analysis, Elsevier, vol. 91(C).
    10. Zheng, Zhen & Lin, Yongjia & Yu, Xiaoou & Liu, Xinming, 2021. "Product market competition and the cost of equity capital," Journal of Business Research, Elsevier, vol. 132(C), pages 1-9.
    11. Koziol, Christian & Kuhn, Simon, 2023. "The impact of regulation on risk and return," Economics Letters, Elsevier, vol. 228(C).
    12. Chu Wang & Char-Lee Lok & Lian Kee Phua, 2023. "Ownership Structure and Capital Structure: Moderating Effect of Product Market Maturity," SAGE Open, , vol. 13(4), pages 21582440231, December.

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