EconPapers    
Economics at your fingertips  
 

Leverage, competition and financial distress hazard: Implications for capital structure in the presence of agency costs

Mehmet Ugur (), Edna Solomon and Ayaz Zeynalov

Economic Modelling, 2022, vol. 108, issue C

Abstract: Does leverage or product-market competition increase or decrease financial distress risk? The existing literature provides conflicting and largely a-theoretical answers. Drawing on agency theory, we hypothesize that leverage and competition are incentive-alignment mechanisms with non-monotonic and substitute effects on financial distress hazard. Using an unbalanced panel of 13,896 listed firms from 1992 to 2014 and a multi-level hazard model that takes account of frailty and endogeneity, we find that leverage or competition have a hazard-reducing effect when the discipline effect dominates the agency-cost effect. In contrast, they have a hazard-increasing effect when the agency-cost effect dominates the discipline effect. Furthermore, the level of leverage that minimizes financial distress risk is higher in less competitive industries. Finally, long-term debt is a stronger disciplining device compared to short-term debt; and the financial distress predictors widely used in the literature explain only a small fraction of the distress hazard after controlling for leverage and competition.

Keywords: Financial distress; Competition; Leverage; Hazard modeling (search for similar items in EconPapers)
JEL-codes: C23 C25 C41 G30 G33 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999321003291
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999321003291

DOI: 10.1016/j.econmod.2021.105740

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2022-09-08
Handle: RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999321003291