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Rivals’ competitive activities, capital constraints, and firm growth

Mikael C. Bergbrant, Delroy M. Hunter and Patrick Kelly ()

Journal of Banking & Finance, 2018, vol. 97, issue C, 87-108

Abstract: We examine the impact of rivals’ competitive activities on firms’ quantity-of-capital constraints in 60 countries. Prior work shows that competition increases the costs of debt and equity, which reduce the economic profit from investment. Capital constraints, however, may prevent firms from exploiting all positive NPV projects. Using unique survey data and several econometric techniques, we address endogeneity problems that affect both capital constraints and rivals’ competitive activities. We find that rivals’ competitive activities are positively associated with firms’ capital constraints and are more strongly correlated with capital constraints than banking sector competition. We also show that quantity-of-capital constraints are negatively related to firm growth, incremental to the cost of capital.

Keywords: Capital constraints; Credit rationing; Competitive activities; Product market competition; Banking competition; Firm growth; Cost of capital (search for similar items in EconPapers)
JEL-codes: G01 G20 G21 (search for similar items in EconPapers)
Date: 2018
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