Leverage and SMEs financial stability: the role of banking competition

Mariarosaria Agostino, Lucia Errico, Sandro Rondinella () and Francesco Trivieri
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Mariarosaria Agostino: University of Calabria
Lucia Errico: University of Calabria
Sandro Rondinella: University of Naples Federico II
Francesco Trivieri: University of Calabria

Journal of Economics and Finance, 2024, vol. 48, issue 2, No 5, 345-376

Abstract: Abstract This work exploits a large panel dataset on Italian manufacturing SMEs to examine the relationship between leverage and firms’ financial stability. Specifically, we evaluate whether and to what extent this link is affected by the degree of competition characterising the local credit market in which firms operate. Using two measures of local banking competition – the H-statistic and the Boone indicator – our evidence indicates that the negative impact of leverage on firms’ financial health is greater for firms operating in more competitive banking markets. A plausible interpretation of this finding is that the competition drawbacks could prevail on its expected advantages, leading banks to be less inclined to establish lending relationships with risky firms, thus exacerbating their financial vulnerability.

Keywords: Local banking competition; Leverage; Z-score; SMEs; Italian provinces (search for similar items in EconPapers)
JEL-codes: G20 G21 L10 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s12197-023-09654-7

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