Based on the data of Chinese A share listed companies from 2008 to 2020, this paper investigates the effect of product market competition on excess goodwill and its mechanism. The results show that product market competition can inhibit excess goodwill and reduce the possibility of subsequent goodwill impairment. The mechanism test shows that reducing agency cost and improving stock liquidity are the mechanism of product market competition to restrain excess goodwill. Further analysis shows that internal and external environments have heterogeneous influence on the relationship between product market competition and excess goodwill. From the perspective of internal governance, product market competition has a more significant inhibitory effect on excess goodwill in enterprises with high quality of internal control and high proportion of independent directors. From the perspective of external environment, product market competition has a more significant inhibitory effect on excess goodwill in enterprises with low shareholding ratio of institutional investors and low attention of analysts. The analysis of economic consequences shows that the inhibition of product market competition on excess goodwill has the effect of easing financing constraints and enhancing value.