The Bright Side of Foreign Competition: Import Penetration and Default Risk

Nader Atawnah, Ghasan A. Baghdadi, Huu Nhan Duong and Edward J. Podolski

Critical Finance Review, 2025, vol. 14, issue 2, 233-275

Abstract: We examine the effect that foreign competition has on firms’ default risk and document a strong and robust negative association. Utilizing a large sample of public U.S. manufacturing firms and industry-level import penetration data, we find that an increase in import penetration from the 25th to the 75th percentile leads to a reduction in corporate default risk of roughly 3%. These results hold after accounting for potential endogeneity concerns. Additional tests reveal that the reduction in default risk is attributable to import penetration reducing idiosyncratic decision making within firms, as well as inducing safer yet more myopic investments. Our results contrast with those of Platt (2020), who shows that the competitive environment increases the cost of debt. We argue that model selection is crucial in studies on the causal effects of competition, with more restrictive models to be preferred due to significant endogeneity concerns.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000158

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