International Evidence on Product Market Competition and Firm Value

• In Event: Product market competition and IFRS adoption
  In Paper Session: Product Mmarket Competition and IFRS Adoption

Abstract

Theory and empirical research suggest higher levels of competition provide benefits to investors by reducing agency costs including substituting for strong corporate governance. However, any reduction in agency costs is likely to depend on the strength of investor protection mechanisms which exist ensuring managers act in the best interests of investors. The existing mechanisms are relatively strong in the United States but much less so in many other countries. This research empirically investigates the influence of competition on firm value in international markets and finds the negative relation between competition and firm value is stronger for firms with higher risk of liquidation. In addition, the negative relation between competition and firm value is attenuated in countries with stronger investor protection mechanisms. Finally, the reduction in agency costs occurring as a result of increased firm transparency provides a greater benefit to firm value when competition is high consistent with investors need for definitive firm information when liquidation risk is highest.

Author

• Joseph R. Rakestraw, Virginia Polytechnic Institute and State University