Corporate Finance and Product Market Competition

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MSc. FIN40430 Strategic Finance
Dr. Cormac Mac Fhionnlaoich Reflective Paper
“Corporate Finance and Product Market Competition”

Elchin Karimov – 09261966

Blackrock 2013

Table of Contents
Abstract………………………………………………………………………………...3 Introduction…………………………………………………………………………….3 Part I: Real Options and Games………………….………………….…………………4 * Competition vs. strategic alliances in consumer electronics……………………………...5 * Case of European airport expansion………………….………………….…………...5

Part II: The Real Effects of Corporate Cash Holdings………………….……………...6 Part III: Corporate Governance, Equity prices and Product Market Competition……..6

Part IV: Negative Aspects of Product Market Competition – Financial Accounting Misreporting and Corporate Governance. ……………………..7

Conclusion………………….………………….………………….……………………9

Appendices
Bibliogpraphy.

Abstract
This paper reviews different Aspects of corporate finance and product market competition. It is important to understand the relation between these two topics in order to make short and long term financial decisions. I discuss 8 papers which are directly and partially related to the above mentioned topic and contribute to its understanding. I focus on the application of Game Theory rules to Corporate Finance and bring some examples of different strategies the managers can face during a game. I also bring forward a case study on European airports expansion to bring into light more examples. Further papers discuss effects of cash holdings on product market, relation of corporate governance to market competition and financial accounting misreporting in terms of market competition and types of corporate governance. I chose specifically these studies, as they approach this topic from different angles and contain a lot of useful information. Upon reading all of these papers, one will a have broad knowledge of the main topic as well as basic idea about the related factors and subtopics.

Introduction
Strategic investment decisions are made in a context where a firm must consider the reaction of other players and the potential positive or negative effect on its own value. Firms make decisions and take deliberate actions that have consequences for other firms. Firm’s ability to pursue a better competitive strategy can be achieved from the knowledge of a competitor’s likely reaction. So in order to design a competitive strategy, firm must anticipate its competitor’s response.

At the general level, product market competition is proved to directly affect financial decisions and corporate investment as it also affects profits and information revelation. Product market competition is predicted to lower market power and profit, which creates two effects related to each other: 1) it reduces the capacity of firm’s investment (due to the the lack of income to support its investment) 2) external funding ability of a firm which affects investment is negatively affected by the lack of income. The information revelation channel indicates that managers easily perform measurement comparisons of their agents' efforts in the presence of similar competitors. This helps ease the information asymmetry problem, hence strengthening the ability of the firm to fund as well as undertake investment. Cheung (2011, 2013). Apart from that there are other factors in terms of market competition that affects company’s decision making and performance. These can both internal and external factors. The first is related to the type of corporate governance, the latter to a type and level of competition. You will see these factors mentioned further in the study. This paper...
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