Competition and the cost of debt

Philip Valta

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Abstract: This paper empirically shows that the cost of bank debt is systematically higher for firms that operate in competitive product markets. Using various proxies for product market competition, and reductions of import tariff rates to capture exogenous changes to a firm's competitive environment, I find that competition has a significantly positive effect on the cost of bank debt. Moreover, the analysis reveals that the effect of competition is greater in industries in which small firms face financially strong rivals, in industries with intense strategic interactions between firms, and in illiquid industries. Overall, these findings suggest that banks price financial contracts by taking into account the risk that arises from product market competition.

Keywords: Product market competition; Import tariffs; Cost of debt; Bank loans (search for similar items in EconPapers)
Date: 2012-09
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Citations: View citations in EconPapers (225)

Published in Journal of Financial Economics, 2012, 105 (3), pp.661-682. ⟨10.1016/j.jfineco.2012.04.004⟩

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Related works:
Journal Article: Competition and the cost of debt (2012)
Working Paper: Competition and the Cost of Debt (2011)
Working Paper: Competition and the Cost of Debt (2010)
Working Paper: Competition and the Cost of Debt (2010)
Working Paper: Competition and the Cost of Debt (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01053591

DOI: 10.1016/j.jfineco.2012.04.004

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