Does foreign competition affect corporate debt maturity structure? Evidence from import penetration

Nader Atawnah, Rashid Zaman, Jia Liu, Thaer Atawna and Aktham Maghyereh

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: This paper examines an unexplored issue of how a firm's competitive environment, proxied by import penetration, affects its debt maturity structure. We document a significant, positive relationship between foreign product competition and the proportion of short-term debt. Our results are robust to a series of sensitivity tests and endogeneity concerns. Utilising large, unexpected reductions in import tariffs as exogenous shocks to foreign competition, we validate the positive effect of import penetration on short-term debt. Our results hold more strongly for firms with high information asymmetry and weak external monitoring. These findings indicate that lenders offer short-term debt to prospective borrowers when they exhibit higher information asymmetry in response to increased foreign competition. Additional tests reveal that short-term debt in a firm's financial structure, contingent upon foreign competition, encourages managers to engage in tax avoidance as an alternative funding source. Our study provides novel evidence of the consequential impact of foreign product competition in debt contracting, giving us insights into its practical implications for corporate strategies and the ramifications of trade liberalisation for policymakers.

Keywords: Foreign product competition; Corporate debt maturity; Information asymmetry; Institutional investors; Analysts following (search for similar items in EconPapers)
JEL-codes: F13 F14 G30 G32 G34 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000558

DOI: 10.1016/j.irfa.2023.102539

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