Friday, December 2, 2022
We review the literature that examines how product markets and competition interact with corporate finance, and provide some ideas for future research. The main takeaway from more than forty years of research is that product market considerations have first-order effects on our understanding of firms’ decisions. The nature and intensity of firms' interactions in the product market influence their ability to obtain financing, impacts their investment, acquisition, and innovation decisions, as well as affects their organizational and governance structure. Firms’ decisions are not only influenced by their product market environment, but their decisions also directly shape the structure of product markets and the resulting competition. The academic literature in this area is now mature, rich, and complex. It spans multiple areas in finance and economics, builds upon various fundamental economic forces, studies a large array of corporate decisions, and highlights that conclusions are often nuanced and depend heavily on the type and extent of competition. We also discuss practical issues related to the measurement of markets and competition that are relevant for future researchers, as well as recent changes in the nature of competition and markets' boundaries. Overall, the literature delivers many important lessons to better understand the determinants and consequences of firms’ decisions.