The purpose of the present study is to discuss the combined effect of predation risk and firms' market power on cash holdings.
The authors tested hypotheses by using consolidated financial data in Japanese firms.
The authors find that firms' cash holdings increase with a rise in predation risk faced by firms. However, the higher the firm's market power, the weaker the above interplay becomes. Moreover, the authors find that even when firms' investments are decreased at the industry level, firms with larger cash holdings seek to mitigate predation risk by funding strategic investments with the potential to steal rivals' market share.
The authors recognize the importance of a firm's market power. Take a firm's market power into consideration to analyze the mechanism of a firm's cash holdings, there is a possibility that the mechanism of a firm's cash holdings as presented by the previous studies will be changed.
