Lutz FirnkornInfluence of Industry Environment on Firms‘ Characteristics

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This study reviews the connection between a firm‘s financing decisions and the industry environment; i.e., the industry structure as well as product market competition. According to existing research, firms should prepare themselves to maintain an investment capacity particularly in concentrated, growing, and volatile industry settings, where investments are uncertain or can have a strategic value. These required adaptations to the industry environment should furthermore lead to a changed investment behavior and return expectations. However, the integrated empirical analysis of all these aspects in one coherent study was missing in the literature to date.

In this research, the review of the existing academic literature is followed by the evaluation if the above described relationships actually hold. The role of industry characteristics – concentration, sales growth, sales volatility and intra-industry position – on the determination of cash holding, leverage, investment and return is reviewed. The analysis finds that cash holding is positively related to a higher industry concentration, industry growth and industry sales volatility. Leverage is not related to those industry characteristics. Furthermore, particularly growing and concentrated industries lead to higher investments; and higher return is associated with higher cash holding than competitors. Additionally, the influence of those industry characteristics on cash holding and investment depends on the interaction between them: the level of one characteristic, e.g., concentration, depends on the level of other characteristics, e.g., sales growth. However, firms deviate from these relationships strongly in the short term in order to react to developments outside of the industry, i.e., economic crisis.

These finding can be relevant for both academics as well as practitioners. For academics to reflect the role of the industry environment for their own research particular in corporate finance and industrial economics. And for practitioners – as well as shareholders and supervising bodies – this work will increase the understanding of more subtle and indirect relationships, particularly that cash is no negative debt.

Ihr Werk im Verlag Dr. Kovač

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