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Leverage, Competition, and Financial Distress Hazard: Non-Monotonic Effects in the Presence of Agency Costs

Mehmet Ugur (), Edna Solomon and Ayaz Zeynalov

No 28304, Greenwich Papers in Political Economy from University of Greenwich, Greenwich Political Economy Research Centre

Abstract: This paper investigates the effects of leverage and product-market competition on financial distress in the presence of agency costs. We demonstrate that leverage and competition have non-monotonic and substitute disciplining effects on managerial slack and financial distress hazard. We take account of potential endogeneity due to the correlation of frailty with the regressors and conduct a wide range of sensitivity checks. Our approach bridges the gap between theory and empirics, offers new avenues for financial distress modelling, and can be applied to other event histories such as corporate defaults or credit downgrades.

Keywords: Financial distress; competition; leverage; hazard modelling (search for similar items in EconPapers)
JEL-codes: C23 C25 C41 G30 G33 (search for similar items in EconPapers)
Date: 2020-05-25
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