 Product market threats and leverage adjustmentsTrung Do, Henry Hongren Huang and Puman Ouyang Journal of Banking & Finance, 2022, vol. 135, issue C Abstract: This research examines the effect of product market threats on firms’ leverage adjustments. We find that competitive pressures from the product market accelerate the leverage speed of adjustment (SOA) toward the target capital structure. To establish the causal effect of competitive threats on SOA, we exploit a quasi-natural experiment provided by large import tariff reductions in the U.S. manufacturing sector and show a significant increase in firms’ leverage adjustments after large tariff cuts. The impact of product market threats on leverage adjustments is more pronounced for firms with poor governance quality and exposed to product market threats. Finally, to the extent that reaching the target capital structure enhances firm value, we note that the faster SOA following competition translates into higher firm value. Overall, our study highlights the “bright side” of product market competition and suggests that agency conflicts between managers and shareholders are attenuated by intensified competition. Keywords: Product market threats; Tariff reduction; Leverage Adjustments; SOA (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:135:y:2022:i:c:s0378426621003162 DOI: 10.1016/j.jbankfin.2021.106365 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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