Do Product Market Dynamics Influence Cash Holdings Behavior and Hedging Strategy of Korean Companies?

This paper investigates whether there is an influence of product market dynamics on a Korean firm’s cash holdings and hedging behavior. Recent prior papers provide that taking advantage of growth opportunity forces to predatory behavior on rival firms and even losses in product market share if a firm shares a larger proportion of firm’s growth opportunities with its rival firms. This issue is closely related to predation risk. Specifically we examines whether the extent of competition in facing rival firms affects to its use of derivatives and the size of its cash holdings. In empirical test, we find that firms are likely to use cash holdings as a risk management tool after controlling characteristic variables of firms. Also our result shows that firms with more industry concentration tend to use derivatives to reduce risk of rival firm’s threat.