Introduction

China’s economy has grown and surpassed the second largest after almost four decades of economic upheaval. In contrast to the free-market economic model adopted by most industrialized economies, China has historically used a government-planned economic model that is always described in ‘Five-Year Plans.’ Evidence shows that government intervention in China leads to market inefficiencies such as resource misallocation and rent-seeking (Chen & Yoon, 2019; Du et al., 2020). The role of governments in promoting economic growth appears to have been a long-running and unsolved problem around the world. Although institutional development has the capacity to affect company decisions, researchers have been captivated by the extent to which government intervention is reasonable. Prior studies on how government influence affects business decisions in China have focused on a number of different things, such as the firm’s performance, ability to pass initial public offerings (IPOs), and financial preferences. Businesses should organize their cash holdings to increase liquidity and reduce transaction costs because cash is closely related to investment plans, financing choices, and operational management. The literature on cash holdings has expanded significantly; prior research reveals that the four factors of tax, transaction, precaution, and agency problems are the root causes of the rising trend in corporate cash holdings (Opler et al., 1999; Bates et al., 2009). Recently, numerous studies have paid attention to macroeconomic factors, for example, economic policy uncertainty (Xu et al., 2016; Demir and Ersan, 2017; Phan et al., 2019); oil price uncertainty (Zhang et al., 2020); grabbing hand effect (Frye and Shleifer, 1997; Fan et al., 2012; Caprio et al., 2013); government quality (Chen et al., 2014; Kusnadi et al., 2015; Xie and Zhang, 2020), etc.

The impact of market rivalry is investigated in this research because it has not been thoroughly studied in recent literature. The influence of market competition is significant because it changes a firm’s financing and investment decisions, such as hedging behavior (Haushalter et al., 2007); leverage ratio (Xu, 2012); corporate investment (Jiang et al., 2015); bank debt financing (Boubaker et al., 2018), etc. Additionally, we focus on market competitiveness in China in this article. Chinese economic problems have gotten much attention because they are the second-largest economy. The Chinese economy began to restructure in 1978. The main goals are to reduce governmental regulation, hasten market liberalization, and ultimately create an economy and price system based on the free market. The last 30 years have seen growth in China’s economy as a result of economic reforms. Even though product market competition is still restrictive, market-based price systems have been built (Conway et al., 2010). Since China is experiencing an economic transition, the product market competition is changing; thus, the case of China provides essential evidence for studying the effect of market competition on a firm’s cash holdings.

Chinese businesses maintain cash reserves to avoid being prevented from acquiring external finance because of the underdeveloped financial system in their nation. We use three key variables: network centrality, structural holes, and directorate interlocks. First, network centrality explains the power of status within network relationships, illustrating the advantages of in-network positional control over resources and increased influence. A corporation has better access to resources and requires less cash when its network is more centralized. Network centrality refers to the measure of a node’s importance or prominence within a network. It captures the extent to which a node is connected to other nodes in the network. In the context of this study, network centrality represents the power and status of a corporation within its network relationships. A corporation with higher network centrality has a more centralized network, indicating in-network positional control over resources and increased influence. Second, structural holes refer to the gaps or missing links between individuals or groups within a network. These gaps represent opportunities for individuals or organizations to bridge connections between otherwise unconnected entities. In this study, structural holes represent the information power within the network structure. Businesses that bridge structural gaps or connect businesses that would not otherwise be connected have better access to information, providing them with a competitive advantage. Second, structural gaps represent information power, with pressures resulting from the information imbalance of the network structure. Businesses that bridge structural gaps or link businesses that would not otherwise be connected have better access to information (Li et al., 2020).

As a result, the recent attention of the public and financial press has been on the substantial cash holdings of businesses. With $285.1 billion in yearly cash, cash equivalents, and securities in December 2017, Apple, for instance, had a cash ratio of roughly 76 percent of total assets. In 2013, S&P 500 firms in the US held $1.2 trillion in cash, more than the GDP of South Korea and Mexico put together. In Asia-Pacific nations, large cash reserves held by enterprises are also typical. This tendency is well-known to both corporate leaders and governments. Former US President Obama once advised US firm CEOs to invest their cash reserves to foster economic growth. Various country-specific factors can help explain excessive company cash hoarding (Li et al., 2020). Third, directorate interlocks, also known as interlocking directorates, occur when individuals serve on the boards of multiple organizations. It refers to the phenomenon of overlapping board members between different companies or organizations. In this study, directorate interlocks represent company connections and relationships through shared board members. Studying directorate interlocks helps to understand corporate governance, power dynamics, and the flow of information and resources within and between organizations.

In the following ways, this essay adds to the body of literature now available. First, we show a connection between cash holdings and product market rivalry, which recent research has yet to look into. Our results support Haushalter et al.’s (2007) observation that cash holdings decline as competition increases. However, in their study, Haushalter et al. (2007) only looked at manufacturing companies, whereas our inquiry examines a whole sample of the Chinese stock market. We then develop a non-linear relationship between currency holdings and competition. Although the non-linear relationship is important, it has never been examined. Current research presupposes that businesses will maintain their investment and financing strategies across several industries. However, Aghion et al. (2005) have found a non-linear relation between investment and market competition; thus, the impact of market competition on cash holdings should also be non-linear due to the pecking order theory. Third, we can examine if the effect of competition varies with different amounts of cash holdings using the panel data quantile regression model. The quantile regression offers all available information because the mean regression yields a linear relationship. We focus on the variability among enterprises as our final point. Four separate stock exchanges, where the total assets of listed enterprises vary from one to the other, are included in our sample because there are still a lot of state-owned businesses on the Chinese stock market. In order to determine whether the influence of competition on cash holdings varies for firms with various total assets and state control over firms, our research focuses on this.

The rest of this article is structured as follows: the literature and theories are briefly reviewed in Section "Literature Review and Hypotheses Development". The first thing the literature demonstrates is the rising trends in cash holdings, which are attracting much interest from researchers. Some recent research links cash holdings to market rivalries. They demonstrate how the link between diversity and cash holdings is influenced by market competitiveness. Additionally, contrary to other studies, they discover that diverse organizations do not hold considerably less cash in a highly competitive market than concentrated ones.

The theories further assert a negative relationship between a firm’s cash reserves and market rivalry since market competition will raise a firm’s investment and R&D costs. According to the second hypothesis, there is a non-linear, U-shaped link between market competition and cash holdings.

Variables

Section "Measure of Variables and Model Specification", which is further separated into cash holdings, product market rivalry, and model specification, supplies the measure of Variables and Model Specification. The data are then displayed, and the empirical findings are examined in Section "Data and Empirical Results", which includes a sample of annual data from 2000 to 2019 that was taken from China’s China Stock Market and Accounting Research Database (CSMAR). The tables presented conclude the results and show complete details of the variables and interaction effects. After that, the robustness of our model is checked in section "Robustness Check", which is mentioned explicitly in Tables 8, 9, and 10. Last but not least, Section "Discussion" concludes the theoretical and managerial implications of the study. The scope for future research is also mentioned in detail, which will help the upcoming academicians and researchers to expand their research base.

Literature Review and Hypotheses Development

Cash Holdings

Cash is a company’s most liquid asset; however, maintaining an enormous amount does not add value due to its low return. The growing trend of cash holdings has attracted much attention from academic researchers; previous studies have identified four motives: tax, transactions, precaution, and agency problems (Opler et al., 1999; Bates et al., 2009).

Agency Problems and Corporate Governance

Numerous studies show that agency problems are originated from corporate governance. Evidence shows that firms with weaker corporate governance tend to hold less cash (Harford et al., 2008; Dittmar and Mahrt-Smith, 2007). However, this finding contradicts Bhuiyan and Hooks (2019); they find a positive relationship between weak corporate governance and excess cash. Feng et al. (2022) show the impact of corporate governance on cash holdings and business value, which has been examined in several studies (e.g., Jebran et al., 2019; Li et al., 2020; Zeng et al., 2020; Su et al., 2020; Tran, 2020). Banks, creditors, and potential equity investors are less willing to invest in enterprises with major agency concerns, according to Feng et al. (2022). As a result, inadequate corporate governance can exacerbate a company’s existing financial constraints, necessitating the holding of more cash. When organizations have bigger free cash flows, agency problems between shareholders and managers are more severe because managers have much more cash to spend according to their benefit at the expense of shareholders.

Additionally, corporate cash holdings grow when ownership concentration increases (Anderson & Hamadi, 2016; Jebran et al., 2019), although Megginson et al. (2014) show that cash holdings grow as state ownership diminishes in China. Additionally, managerial ownership significantly affects cash holdings, and there is no one-to-one correspondence between the two (Ozkan & Ozkan, 2004). A significant factor is the CEO’s remuneration. According to Liu and Mauer (2011), Bereznoy (2019), and Metel’skaya (2021), CEO risk-taking incentives are positively correlated with cash holdings and negatively correlated with the value of cash to shareholders. Feng and Rao (2018) further demonstrate that this positive relationship is caused by the managerial risk aversion effect. Deferred compensation and CEO pensions also favor cash holdings (Liu et al., 2014a, b); this positive correlation is also found in equity-based compensation (Xu, 2013; Duhan & Singh, 2014). Other causes of agency problems are studied as well: shareholder protection (Dittmar et al., 2003; Kalcheva & Lins, 2007; Huang et al., 2013; Gu, 2017); corporate social responsibility (Cheung, 2016); earning quality (Farinha et al., 2018).

Precautionary Motive and Policy Uncertainty

The uncertainty that businesses encounter is typically where the precautionary motive comes from. Evidence suggests that cash holdings are significantly impacted by economic policy uncertainty in two distinct ways (Demir & Ersan, 2017; Phan et al., 2019; Liu & Zhang, 2020). First, Zeng et al. (2020) claim that worsening the external finance situation and increased corporate borrowing rates would result in increasing policy uncertainty. Because the corporate bond market is still in its infancy and because of stringent regulations, the process of issuing seasoned equity is complicated and time-consuming; companies in China often use bank borrowing to cover their external funding needs. Increased policy uncertainty would enhance the level of information asymmetry in capital markets. As a result, banks would impose stricter lending guidelines in an effort to lower the risk of default. It makes it logical for businesses to cut inventory holdings when financial constraints tighten since a higher inventory level puts more strain on working capital. In other words, as financial constraints tighten due to increasing policy uncertainty, the amount of inventory held by the company decreases (Zeng et al., 2020; Su et al., 2020; Liu & Zhang, 2020).

Second, heightened policy ambiguity would encourage the desire to save more precautionary funds, reducing the room for storing inventories and posing a danger to impending production and business activities. When the level of uncertainty rises, prudent managers prefer to keep more cash on hand in order to prevent additional financial difficulties caused by liquidity shortages (Younsi & Bechtini, 2020; Li & Wang, 2019). Because inventories and cash are the two critical components of short-term assets in a company’s day-to-day operations, firms tend to minimize inventory investment as cash holdings rise (Zeng et al., 2020; Phan et al., 2019; Zeng et al., 2020).

Like many other governments, the Chinese typically create a ‘transition phase’ before enacting and changing economic policies. For instance, the government can either set a date for a policy going into force or choose a ‘pilot’ to evaluate the program’s viability. This method avoids the ‘one-size-fits-all’ issue (Su et al., 2020; Ye, 2018). A new economic policy also takes time, providing businesses time to alter their operational and investment strategies. Emergency cash is essential during the ‘breathing’ period because it enables tactical modifications. As a result, during the early stages of an economic policy’s implementation, firms tend to cut their cash reserves and seek more investment avenues to take advantage of the new policy’s growing market prospects. However, as the economic plan is put into practice, the level of uncertainty will rise. As uncertainty increases and exceeds expectations, businesses are more likely to exhibit cautious behaviors, such as postponing investment plans and raising precautionary cash reserves (Su et al., 2020; Ranajee & Pathak, 2019; Hu et al., 2019).

Contrarily, Xu et al. (2016) find that, as measured by the turnover of government officials, cash holdings are adversely connected with policy uncertainty. Because business investment rises when oil prices are unclear, uncertainty about oil prices have also been shown to influence cash holdings negatively (Zhang et al., 2020; Halal, 2015). Cash holdings are found to be sensitive to financial flow volatility for financially limited enterprises by Han and Qiu (2007), but unconstrained firms are unaffected. The refinancing risk of firms can be mitigated as cash holdings increase (Harford et al., 2014; Su et al., 2020; Dewri, 2021). Moreover, firms with higher credit spreads tend to hold more cash (Acharya et al., 2012).

Grabbing-Hand Effect and Corruption

Another crucial theory is the grabbing-hand effect, described as government officials taking resources away from businesses, as documented by Frye and Shleifer (1997). Firm owners may alter their investment, contracting, and finance policies to reduce the risk of loss from political extraction when faced with a high rate of expropriation by officials. Additionally, debt financing is better since authorities are less likely to expropriate debt holders (Stulz, 2005). Additionally, corporations tend to employ more debt, particularly short-term debt, in nations with higher levels of corruption and laxer legal systems, as per Fan et al. (2012). According to Caprio et al. (2013), businesses that hold fewer liquid assets are more susceptible to political corruption.

Moreover, firms will invest more in property, plants, and equipment since these assets are harder to be extracted. However, current literature provides opposite evidence on the relationship between cash holdings and corruption because of the financial constraint mitigation effect (Chen et al., 2014; Zhao, 2021). Moreover, Xie and Zhang (2020) also prove that firms in provinces with vigorous anti-corruption intensity hold less cash than those with weak anti-corruption intensity.

Market Competition and Cash Holdings

The relationship between market competition and cash holdings has been a subject of research, revealing interesting insights into the dynamics of firms’ financial management strategies. This section examines various aspects of this relationship, including diversity, R&D and innovation, talent competition, the value of cash, and market rivalry. Understanding the interplay between competition and cash holdings is particularly important in the context of China, which is currently undergoing a transition in its product market environment.

Diversity and Cash Holdings

Diversity within a firm refers to the presence of different product lines, business segments, or geographical locations in its operations. The relationship between diversity and cash holdings has been an area of research that sheds light on how market competition influences a firm’s financial decisions.

Traditionally, it has been assumed that diverse firms hold less cash compared to concentrated firms due to increased operational complexity and resource allocation challenges. However, recent research, such as the work of Atanasova and Li (2018), suggests that the relationship between diversity and cash holdings is mediated by market competition.

Atanasova and Li’s findings challenge the conventional belief by demonstrating that in highly competitive market environments, diverse firms do not necessarily maintain considerably lower cash holdings compared to concentrated firms. Market competition appears to mitigate the negative impact of diversity on cash reserves for these firms. One possible explanation for this phenomenon is that competition drives diverse firms to be more innovative and adaptable, which can enhance their ability to generate cash flows. The heightened competitive pressure may incentivize diverse firms to focus on strategic resource allocation and efficient cash management practices to maintain their competitive edge.

Competition, R&D, and Innovation

According to Fresard (2010), when the product market is more competitive, businesses with more enormous capital reserves do noticeably better in gaining future market share. At the same time, a dedication to long-term viability motivates company R&D. As a result, companies typically invest in R&D and engage in an innovation competition. According to Khan et al. (2020), firms in high-competition contexts are under more pressure to succeed in the market; as a result, competitive firms engage heavily in R&D initiatives to obtain a competitive advantage over their competitors.

On the other hand, those with successful innovation initiatives receive the rewards and, as a result, increase their market share. In contrast, the majority of publicly traded companies struggle to develop new technology or products. Their competitors may stop or abandon their R&D initiatives, leaving them with no future cash flow, as R&D spending is irreversible (Khan et al., 2020; Asongu & Nwachukwu, 2019; Bahri & Hamza, 2020).

Talent Competition and Cash Holdings

He (2018) established a relationship between talent competition and cash holdings as an alternative to product market competition. The results show that cash holdings rise when talent competition in the industry intensifies, and this effect is amplified for firms that place a greater emphasis on talent and industries where competition is more knowledge-based industries.

The findings suggest that as the competition for skilled professionals increases, firms recognize the need to attract and retain top talent by offering competitive compensation packages and employee benefits. Companies allocate more cash to their holdings to secure the necessary resources and maintain a talent advantage. Due to talent competition, industries that heavily rely on knowledge and specialized skills, such as technology, research, and development, experience a stronger impact on cash holdings. In these sectors, the availability of exceptional employees can significantly influence a company’s competitive position and ability to innovate. Consequently, firms in knowledge-based industries may be more inclined to hold larger cash reserves to fund talent acquisition and retention efforts.

Value of Cash and Market Competitiveness

Alimov (2014) establishes a connection between the value of cash and market competitiveness in place of cash holdings. It has been demonstrated that the tariff reductions will raise the value of cash reserves in industries with high import tariffs under the 1989 Canada-U.S. Free Trade Agreement, which is utilized as an exogenous variation to market competitiveness.

Market Rivalry and Cash Holdings

Haushalter et al. (2007) demonstrate, using data from the manufacturing sector, that market rivalry positively affects cash holdings and that this effect is even stronger the more interdependently a firm’s investment opportunities are with its competitors. Additionally, businesses prefer to store more cash when they are near the industry’s technological hub (Ye, 2018).

It can be seen that prior work rarely establishes a link between competition and cash holdings, and none of them have put their attention on the case of China, however, which is important because China is experiencing a transition in the product market environment (Bahri & Hamza, 2020; Dewri, 2021). Additionally, present research primarily looks at the linear link, leaving unclear the connection between cash holdings and competition. We present evidence for the non-linear relationship in this paper using the pecking order theory and the works of Bereznoy (2019), Aghion et al. (2005), and Myers and Majluf (1984). Additionally, using the panel data quantile regression model, we thoroughly analyze the effect of competition on various cash holding levels. Additionally, we look into how a firm’s total assets and state ownership affect the relationship between cash holdings and market competition using the characteristics of the Chinese stock market.

Hypotheses Development

Because market rivalry will raise a firm’s spending on R&D and investment, we suggest a negative link between market competitiveness and cash holdings. First, this research indicates a link between innovation and market rivalry. Geroski (1990) contests the widely accepted Schumpeterian theory that monopolies encourage innovation. His empirical findings show that market concentration lowers innovation and R&D spending across a range of monopoly power indicators. Since market competition and R&D spending have a positive correlation, Nickell (1996) concludes that competition enhances company performance. Second, there is a favorable association between business investment and market rivalry (Mouna & Anis, 2017; Bayighomog et al., 2020; Zeng et al., 2020). According to fundamental options theory, when faced with uncertainty, businesses would delay their investment if the value of the waiting option is higher than the immediate benefits of investment.

On the other hand, as uncertainty diminishes, the value of waiting diminishes while the value of expanding business increases. It will also be more likely that market share will be gained and that business will expand. As a result, when faced with greater uncertainty, a firm’s investment is decreased, but the investment is stimulated when faced with less uncertainty. Jiang et al. (2015) show that, as China has been experiencing considerable and predictable economic growth when facing high competition, firms will invest earlier to capture the market. The same results are found by Vo and Le (2017); they show that firms invest more when facing uncertainty, and this effect will be enhanced for firms facing higher market competitiveness. Moreover, the pecking order theory (Myers & Majluf, 1984; Zhao, 2021) shows that firms initially finance their investment with earnings and need external financing when internal financing is insufficient. As a result, if the pecking order theory holds, when firms postpone their investment, cash holdings of firms increase; on the other hand, when firms choose to increase investment, cash holdings start to decrease since firms finance the investment with their own earnings at first. Hence, a firm’s cash holdings will decrease as the competitiveness of the market increases (Li & Wang, 2019; Ye, 2018).

Furthermore, we put out our second hypothesis, which states that the relationship between market competitiveness and cash holdings is non-linear and takes the form of a U-shape. Aghion et al. (2005) demonstrate, using a theoretical model, that when competition is low, the escape-competition effect predominates, encouraging neck-and-neck enterprises to innovate and increase R&D investments. However, the Schumpeterian effect prevails because of the intense rivalry, discouraging laggard firms from innovating by lowering their post-entry costs and R&D expenditures (Khan et al., 2020; Asongu & Nwachukwu, 2019; Bahri & Hamza, 2020). Their model predicts an inverted-U-shaped relationship between competition and innovation, proved by their empirical results with UK panel data. Based on the findings of Aghion et al. (2005), and if the pecking order theory holds, we expect a U-shaped relationship between competition and cash holdings. Based on the above arguments, the following hypothesis has been formulated:

Hypothesis 1: There is a negative relationship between market competitiveness and cash holdings.

As market rivalry increases, firms are expected to allocate more resources to R&D and investment, leading to lower levels of cash holdings. This hypothesis is supported by the positive correlation between market competition and R&D spending, as well as the favorable association between business investment and market rivalry.

Hypothesis 2: The relationship between market competitiveness and cash holdings follows a non-linear pattern in the form of a U-shape.

Theoretical models and empirical evidence suggest that at low levels of competition, the ‘escape-competition effect’ encourages firms to innovate and invest in R&D. However, at high levels of competition, the ‘Schumpeterian effect’ discourages laggard firms from innovating. Based on these findings and the pecking order theory, we expect to observe a U-shaped relationship between market competition and cash holdings.

Measure of Variables and Model Specification

Cash Holdings

The dependent variable in our model is cash holdings. Following the general specification (Opler et al., 1999; Bates et al., 2009; Liu and Mauer, 2011; Xu et al., 2016; Feng and Rao, 2018), the cash-to-net assets ratio is used in this paper, which is defined as cash and marketable securities to net assets, and net assets are the difference between total assets and the sum of cash and cash equivalents.

Product Market Competition

The measure of product market competition that is widely used in the literature is the Herfindahl-Hirschman Index (HHI), which is defined as the sum of squared market shares:

$${HHI}_{Jt}={\sum }_{j=1}^{{N}_{j}}{S}_{ijt}^{2}$$
(1)

where \({S}_{ijt}\) denotes the market share of firm \(i\) in industry \(\mathrm{j}\) in year \(t\), and \({N}_{j}\) represents the number of firms in industry \(\mathrm{j}\). Higher HHI indicates higher market concentration, thus, less market competition.

Model Specification

$${CASH}_{it}={\beta }_{0}+{\beta }_{1}{HHI}_{jt}+\sum_{k}{\beta }_{k}{CONTROL}_{it}^{k}+{\varepsilon }_{it}$$
(2)

where, for firm \(i\) and year \(t\), \(CASH\) refers to cash holdings, \(HHI\) denotes market competition in industry \(\mathrm{j}\) in year \(t\). \(CONTROL\) represents a set of control variables. \(\varepsilon\) are the unobserved random errors.

Following the specification of Bates et al. (2009), the firm’s cash flow (CF) is included because the firm’s cash holdings increase with cash flow. When leverage is constraining, firms choose cash to reduce leverage; thus, leverage (LEV) is expected to correlate negatively with cash holdings. Then, a dummy dividend payment (DIV) is also included; firms that pay a dividend are less risky and easier to access the capital market; as a result, these firms are less driven by a precautionary motive. Since networking capital (NWC) consists of assets substitutable for cash, NWC is also included. Assets created by Capital expenditure (CAPEX) provide the extra ability of external financing, then firms with higher CAPEX are less motivated to hold cash. We also control liquidity (LIQ) in our specification; firms with high liquidity are less motivated to hold more cash because they are substitutes for each other (Farinha et al., 2018). The SIZE of firms is also controlled, defined as the natural logarithm of firms’ sales. Because the borrowing cost for more prominent firms is lower, they are less constrained by external finance; thus, the cash reserves of larger firms are likely to decrease (Opler et al., 1999; Farinha et al., 2018). Market-to-book ratio (MB) is included to capture firms’ growth opportunities (Ozkan and Ozkan, 2004; Bates et al., 2009; Podolski et al., 2016). Finally, the profitability of firms (ROA) is controlled as well.

Data and Empirical Results

Cash holdings play a crucial role in corporate financial management and have garnered significant attention in academic research. In this study, we focus on investigating the determinants of cash holdings, with a particular emphasis on the impact of product market competition. We examine how firms adjust their cash holdings in response to varying degrees of market competition, as measured by the Herfindahl-Hirschman Index (HHI).

Data

Our sample contains annual data from 2000 to 2019 because cash flow data began in 1998 in China. The rationale behind choosing the specific time period (2000-2019) is primarily driven by the availability of cash flow data in China. The cash flow data began in 1998, and therefore, the researchers have chosen to start their sample from 2000 onward. By selecting this time frame, this study ensured that they had a substantial amount of data to analyze and draw meaningful conclusions. The data are extracted from the China Stock Market and Accounting Research Database (CSMAR) (Ding et al., 2020). Our sample contains firms from the Shanghai Stock Exchange, the Shenzhen Stock Exchange, the Small and Medium Enterprise Board, and the Growth Enterprise Market. The industry of the financial sector is excluded from the sample. Our data set is reduced to unbalanced panel data due to missing observations because some firms do not have complete datasets. The data are winsorized at 1% and 99% levels.

Table 1 shows the detailed definition of all variables. Table 2 represents the summary statistics of all variables. On average, firms hold 29% of their net assets in cash and marketable securities. The market competition averages 0.07 with a standard deviation of 0.12. Table 3 reports the Pearson correlation coefficients of variables. Generally, the results reveal no multicollinearity.

Table 1 Definition of variables
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Table 2 Descriptive statistics of variables
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Table 3 Correlations of variables
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The Impact of HHI on Cash Holdings

The results for the impact of market competition on the cash holdings of firms are shown in Table 4. Results of pooled regression with White-robust standard errors are represented in column (1); Then, two-way cluster standard errors are used to control the intragroup correlation and serial correlation; results are shown in column (2); Finally, column (3) reports the results controlling the firm and year fixed effects with White-robust standard errors.

Table 4 Results of the impact of competition on a firm’s cash holdings. Dependent variable: CASH. Three different estimation methods are used. Column (1) represents pooled regression with White-robust standard errors; to control the intragroup correlation and serial correlation, we use two-way clustered standard errors, as shown in column (2); The firm and year-fixed effect is added with White-robust standard errors in columns (3)
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We can conclude that the cash holdings of firms decrease with market competition. Consistent with our expectation, market competition makes firms hold less cash because of increased corporate investment; our results align with Haushalter et al. (2007) since larger firms are less risky and likely to hold less cash, which is consistent with Farinha et al. (2018). Like Opler et al. (1999) and Xu et al. (2016), our findings also show that firms with higher CF tend to hold more cash. Moreover, profitability positively correlates with cash holdings; in other words, firms hold more cash when they earn more.

Moreover, our finding reveals a negative relation between cash holdings and MB, consistent with Xu et al. (2016), which also study the Chinese stock market. However, this violates the conclusion that firms with better investment opportunities hold more cash to prevent financial distress (Opler et al., 1999; Dittmar et al., 2003; Bates et al., 2009; Farinha et al., 2018). Our results show that firms paying dividends hold more cash which challenges the findings of Bates et al. (2009) and Farinha et al. (2018). NWC, CAPEX, and LEV coefficients are negative; these results align with Bates et al. (2009). NWC can be considered a substitute for cash; thus, higher NWC induces lower cash holdings. CAPEX can be used as collateral for bank debt, reducing cash demand. Firms will use cash to lower leverage when facing high leverage; thus, leverage and cash holdings are negatively correlated. The result of LIQ is not statistically significant in our specification.

Non-linear Relationship Between Market Competition and Cash Holdings

Thus far, it has been shown that cash holdings decrease with market competition. Furthermore, we are also interested in their non-linear relationship. To do so, a squared term of HHI is added to our specification. We estimate the following model:

$${CASH}_{it}={\beta }_{0}+{\beta }_{1}{HHI}_{t}+{\beta }_{2}{HHI}_{t}^{2}+\sum_{k}{\beta }_{k}{CONTROL}_{it}^{k}+{\varepsilon }_{it}$$
(3)

The empirical results are represented in Table 5. We apply the same model specification as the previous section. After controlling the firm and year-fixed effects, our findings reveal that the effect of institutional development on cash holdings is non-linear and exhibits an inverted U-shape. This finding shows that when market competition is low, the firm’s cash holdings decrease with the competition. However, when market competition increases and achieves a relatively high level, a firm’s cash holdings increase with the competition. Our findings support the pecking order theory and the findings of Aghion et al. (2005). As discussed above, when competition is low, the escape-competition effect dominates, and neck-and-neck firms are encouraged to innovate; thus, R&D investments increase. As a result, a firm’s cash holdings decrease because firms choose to finance R&D investments by reducing cash. On the other hand, as the competition is high, the Schumpeterian effect dominates, and laggard firms are discouraged from innovating by reducing their post-entry costs and decreasing R&D investments; hence, cash holdings will increase because the demand for cash decreases.

Table 5 Results of a non-linear relation between competition and cash holdings. Dependent variable: CASH. Three different estimation methods are used. Column (1) represents pooled regression with White-robust standard errors; to control the intragroup correlation and serial correlation, we use two-way clustered standard errors, as shown in column (2); The firm and year-fixed effect is added with White-robust standard errors in columns (3)
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Quantile Regression

Table 4 shows us the results of the mean regression of the impact of market competition on cash holdings: that, on average, a firm’s cash holdings decrease with market competition. However, it is also imperative to understand the effect of competition on different levels of cash holdings. The quantile regression provides a complete picture. In this section, we use quantile regression to investigate this effect. We estimate seven quantiles, from the lower (0.05) to the higher (0.95).

The empirical results are reported in Table 6. Results show that the impact of market competition on different levels of cash holdings differs. The coefficients of the first two levels are negative, then they become positive. It can be seen that, with a low level of cash holdings, the increase in market competition will lead firms to hold more cash. Nevertheless, this impact will become negative as the cash holdings increase. Moreover, there is an increasing trend of the impact of market competition, which shows that the impact of competition increases as the level of cash holdings increases. The possible explanation is that when a firm’s cash reserves are relatively low, firms choose to hold more cash, facing increasing market competition due to precautionary motives. Because investment is risky and costly for firms with a low cash level, they choose not to invest, then cash holdings increase.***

Table 6 Results of the impact of market competition on cash holdings with quantile regression. Dependent variable: CASH. We estimate a quantile regression model for panel data (QREGPD) with nonadditive fixed effects. Adaptive MCMC optimization technique is applied, 1000 draws are performed, and 100 draws drop as a burn-in period. The acceptance rate is set to 0.5
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On the contrary, when firms hold a large amount of cash, the increase in competition leads them to invest more because it is less risky and costly for cash-rich firms; thus, cash holdings decrease. Furthermore, the more cash held by firms, the less risky the investment for firms. Hence, the impact of market competition exhibits an increasing trend.

Interaction Effects

Thus far, both linear and non-linear effects of market competition on cash holdings have been investigated. Furthermore, we attempt to explore whether this effect differs across different companies. To do so, we study the interaction effects of market competition with total assets and state-owned features of firms. In the Chinese stock market, a large number of state-owned companies (SOEs), the objective of which is not only profit maximization but also social and political intention. As a result, SOEs may have different reactions after facing market competition (Carpenter et al., 2015).

Meanwhile, in our sample, we include firms from four stock exchanges: the Shanghai Stock Exchange, the Shenzhen Stock Exchange, the Small and Medium Enterprise Board, and the Growth Enterprise Market; the requirements to be listed in these stock exchanges differ from each other. Thus, the total assets of firms in our sample account for the large difference. Furthermore, larger firms are generally less risky; thus, they are less motivated to invest as competition increases. As a result, their responses to market competition should be different from those of firms with lower total assets (Feng and Rao, 2018).

We add interaction terms in the regression model to capture the interaction effects.

$${CASH}_{it}={\lambda }_{0}+{\lambda }_{1}{HHI}_{t}+{\lambda }_{2}HHI*{Z}_{it}+\sum_{k}{\lambda }_{k}{CONTROL}_{it}^{k}+{\varepsilon }_{it}$$
(4)

where Z represents the total assets (ASSET) and state-owned feature (STATE) of firms, respectively.

Empirical results are reported in Table 7. Our results show that the coefficients of interaction terms are negative for both ASSET and STATE. These results coincide with our expectation; namely, the impact of competition will be attenuated as firms become larger due to their greater resources, market power, and potentially lower risk profiles. As we argued, larger firms are less risky; they choose not to invest more, even facing higher competition. The state-owned feature also mitigates the impact of competition. Profit maximization may not be the priority of state-owned companies, and they are less sensitive to market conditions. Again, they are less motivated to invest more.

Table 7 Results of the interaction effects of market competition with STATE and ASSET. Dependent variable: CASH. Columns (1) and (4) represent pooled regression with White-robust standard errors; to control the intragroup correlation and serial correlation, we use two-way clustered standard errors, as shown in Columns (2) and (5); The firm and year-fixed effect is added with White-robust standard errors in column (3) and (6)
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Robustness Check

To assess the robustness of our model, we make the following modifications. First, two other measures are proxies for market competition: the number of firms in the industry (PMC) and the concentration ratio of the four largest firms in the industry (CR4); these two measures are also widely used in current literature (Haushalter et al., 2007; Huang and Lee, 2013; Jiang et al., 2015). Results are reported in Table 8. To compare, we put the results of HHI together. Higher market competition is reflected by higher PMC and lower CR4. Consistent results for all three measures show that cash holdings decrease with market competition.

Table 8 Results of alternative measures of market competition. Dependent variable: CASH. The firm and year-fixed effects are controlled with White-robust standard errors
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The second concern is our sample period, which covers two specific periods. First is the global financial crisis (González, 2015; Mercatanti et al., 2019), including the American Subprime Mortgage Crisis and the European Sovereign Debt Crisis. Second is the Split Share Structure Reform (SSSR) in China which causes structural changes to the Chinese stock market, including agency problems and mispricing issues (Chen et al., 2015; He et al., 2017), capital structure (Liu & Tian, 2012; He and Kyaw, 2018), stock price informativeness (Hou et al., 2012), and dividend payment (Liu et al., 2014a, b). To isolate the effect of the global financial crisis and the SSSR, we break our sample into three subsamples. Since these two specific periods are overlapped, we define the period from 2005 to 2012 as a subsample for the global financial crisis and the SSSR. Thus, the period before 2005 is considered another subsample, and the subsample starting from 2013 is the post-crisis and post-reform period. Empirical results are represented in Table 9. Our findings from subsamples are consistent with the results from the complete sample. Market competition has a negative impact on cash holdings, indicating that the effect of the competition is not affected by the global financial crisis and the SSSR.

Table 9 Empirical results for different time periods. Dependent variable: CASH. The firm and year-fixed effects are controlled with White-robust standard errors
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Finally, a firm’s investment behavior financed by cash reserves may cause market competition to change (Haushalter et al., 2007). Thus, to relieve the possible endogeneity problem between market competition and cash holdings, the lagged measures of market competition are applied as instruments in our model. Results are reported in Table 10; the findings are still robust, supporting our previous conclusion that market competition negatively impacts cash holdings.

Table 10 Results of lagged measures of market competition. Dependent variable: CASH. The firm and year-fixed effects are controlled with White-robust standard errors
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Discussion

Research has examined how business factors affect cash holdings. Bereznoy (2019) asserts that there is a tendency to increase cash holdings among multinational businesses with substantial R&D concentration. According to Bahri and Hamza (2020), mature firms do not need to keep significant amounts of capital because their earnings and cash flow are stable. According to Bayighomog et al. (2020), large businesses store less cash as a percentage of revenues because of scale economies and transaction expenses. Cash holdings have a strong association with cash flows and growth potential but a negative correlation with financial debt, according to Mouna and Anis (2017). According to Dewri (2021), high-cash businesses exhibit superior operating results, vigorous growth, higher levels of investment, and larger market-to-book asset ratios. By keeping enough cash on hand, businesses can avoid underinvestment problems, and those with better investment prospects prefer to keep more cash on hand (Feng et al., 2022; Khan et al., 2020). Our study advances three existing avenues of inquiry. First, we contribute to the body of information regarding how uncertainty affects business ethics. Su et al. (2020) found a strong correlation between merger and acquisition activity at the macro and company levels with political and regulatory instability.

The prior research demonstrates a significant inverse relationship between business-level capital investment and the overall level of policy uncertainty using the economic policy uncertainty index. According to Ding et al. (2020), policy uncertainty is positively correlated with corporate cash holdings as a result of enterprises’ precautionary objectives. Second, we add to the body of knowledge regarding corporate inventory holdings. Previous studies have linked financial constraints and uncertain sales to the volume of corporate inventory stocks. Ye (2018) asserts that higher levels of sales uncertainty result in higher inventories. We expand on previous studies by highlighting the overall economic policy uncertainty as a significant factor affecting firm inventory holdings. We add to this body of knowledge by demonstrating that enterprises reallocate inventories and cash to deal with the unpredictability that comes with economic policy changes (Khan et al., 2020). Third, our work is related to ongoing research on the effects of political unpredictability on listed companies in the Asia-Pacific region.

According to current research, Chinese corporations drastically reduce their cash holdings and company investment during times of political unrest. According to Zhao (2021), China’s high levels of political unrest may cause fewer initial public offerings (IPOs) and poorer post-IPO results. Uncertainty in economic policy will restrict businesses’ access to outside capital in terms of funding. Uncertainty in economic policy worsens the information gap between internal and external stakeholders while raising operational risks. As a result, the company’s potential for external funding and future profitability is anticipated to decrease. For effective investment operations to be maintained, businesses are likely to reduce cash holdings. Firms are more inclined to constrain their budgets and store more internal precautionary funds when unpredictability reaches a high level beyond their control in order to buffer the effects of higher uncertainty on their financing operations and reduce operating risks (Su et al., 2020; Khan et al., 2020).

To sum up, businesses have faced both possibilities and challenges as a result of the uncertainties surrounding economic policy. Businesses can expand their operations and investment activities by using present cash savings to take advantage of the new development opportunity early in the policy’s implementation. On the other hand, greater uncertainty will make it harder for managers to evaluate their firms’ prospects, as well as create financing friction, which will encourage enterprises to increase precautionary cash holdings rather than expand investment (Su et al., 2020; Li et al., 2020). They discovered that cash holdings are favorably associated with corporate governance. Cash holdings are higher when company governance is better. When corporate governance is in good shape, shareholder power increases, and the agency problem alleviates. At this point, shareholders can direct the manager to keep more cash. Also, the research shows that the company’s cash holding level displays a trend of declining initially, then rising, and finally falling with the increasing fraction of the managers’ shareholding (Ye, 2018).

Conclusion

In recent literature, this study indicates a rarely explored relationship between cash holdings and market rivalry. As a result of increased investment due to market competition, corporations will hold less cash since internal capital is used to fund the investment. Therefore, cash holdings decline as market competition increases. Furthermore, according to Aghion et al. (2005)’s research, the relationship between investment and market competition has an inverted U-shape; as a result, according to the pecking order hypothesis, the relationship between market competition and cash holdings also has a U-shape.

Theoretical Implications

The main conclusions are as follows: First, when cash flow uncertainty is substantial, the cautious influence of this uncertainty on R&D investment predominates, leading management to make conservative investment decisions. Second, businesses with higher cash flow uncertainty invest in R&D innovation more cautiously, whereas businesses with lower cash flow innovation more aggressively. Third, financial friction may exacerbate the negative effects of cash flow uncertainty on innovation efforts. Corporate cash flow affects corporate investment when a company has a severe internal cash shortage due to high external financing costs. Fourth, strategic cash holding can help a business lower the risks connected to unpredictability in cash flow.

Managerial Implications

With a sample from the Chinese stock market, our empirical findings are in line with what we had anticipated. With two-way fixed panel data regression, it is demonstrated that there are linear and non-linear relationships between cash holdings and market competition. We observe a rising tendency in the influence of market rivalry as cash holdings rise. Additionally, state-owned businesses are protected from the effects of competition, and enterprises with higher overall assets are less affected by market competition. Last but not least, our model passes various robustness tests. In conclusion, policy uncertainty has a major impact on how corporate inventories are adjusted, and the effect varies depending on the ownership structure. As a consequence, in order to avoid ‘changing overnight,’ authorities should take consistency into account when adopting new economic policies.

Furthermore, when designing economic policy, authorities should solicit a wide range of viewpoints and effectively dispel market uncertainties to avoid significant economic shocks. Firms facing economic policy changes should adjust the mix of inventory and cash holdings to actively guard against short-term risks, in addition to increasing their analysis of the economic environment and recognizing the long-term development trend. These findings have significant repercussions for managers, investors, and politicians. First, according to our findings, businesses should factor uncertainty into their future R&D investment strategy. Second, our study shows that spending on R&D is impacted by policy uncertainty. As a result, the findings have important policy implications for emerging economies, particularly for those where the state is dominant and the market is unstable. The results of this study suggest that less regulatory uncertainty can increase the effectiveness of R&D investment, which might encourage businesses to invest more in R&D initiatives. Finally, our study suggests that rivalry is a critical factor in regulating the uncertainty-R&D relationship in ways that vary depending on the size of the organization, with significant managerial consequences.

Ideas for Future Research

Think about all the variables that affect cash holdings. Now two lines of research are being done on the variables that affect cash holding. The internal characteristics of the company and macroeconomic conditions make up the first. On the other hand, suppliers and customers are large external stakeholders in the company’s downstream and upstream and have a significant influence on corporate operations and financial decisions. Therefore, it is crucial to look into how interactions between suppliers and customers affect cash holdings.