The Effect of Corporate Growth Opportunity and Product Market Competition on Free Cash Flow in China

Asymmetric information and economic uncertainty lead to more serious financial constraints on Chinese listed companies, thereby prompting them to hold more cash to guard against uncertainty and market competition. Using a sample of 45,303 observations of Chinese listed companies between 2010 and 2022, this study analyzed the relationship between corporate growth opportunity, product market competition (PMC), and cash holdings (CH). A quantity analysis model is used to examine the correlation between corporate growth opportunity and corporate CH while considering external factors such as PMC. Corporate growth opportunity leads to enterprises increasing their CH. However, fierce PMC reduces the enterprise CH level, and this effect is even more pronounced for high-growth opportunity enterprises, thus indicating that market competition efficiently mitigates such enterprises holding excess cash. Therefore, to improve enterprise cash-use efficiency, reducing information asymmetry under fierce PMC is essential. In summary, this study not only presents valuable insights into enhancing cash-use efficiency but also helps enterprises to implement more favorable market competition strategies and maintain a dominant position under fierce market competition. JEL Classification: G30