Competition and the Cost of Debt

Philip Valta

Working Papers from HAL

Abstract: This paper empirically investigates how the intensity of product market competition affects the cost of debt. Using a large sample of loans to publicly traded US manufacturing rms, I provide evidence that an intensi cation of product market competition among fi rms signi cantly increases the cost of bank loans. The analysis reveals that the effect is strongest in industries with high illiquidity and speci city of assets. This finding indicates that the liquidation value of assets is an important channel through which competition affects the cost of debt. Moreover, I find that loans to firms that operate in more competitive industries contain more covenants restricting the firms financing and dividend policies. Overall, the results suggest that banks explicitly take into account the risk arising from product market competition when pricing and designing debt contracts.

Keywords: Product Market Competition; Financing Costs; Financial Contracts (search for similar items in EconPapers)
Date: 2010-04-29
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Published in 2010

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Related works:
Journal Article: Competition and the cost of debt (2012)
Working Paper: Competition and the cost of debt (2012)
Working Paper: Competition and the Cost of Debt (2011)
Working Paper: Competition and the Cost of Debt (2010)
Working Paper: Competition and the Cost of Debt (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00515913

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