Competition and the Cost of Debt
59 Pages Posted: 23 Oct 2009 Last revised: 6 May 2013
Date Written: November 8, 2011
This paper empirically shows that the cost of bank debt is systematically higher for firms that operate in competitive product markets. Using various proxies for product market competition, and reductions of import tariff rates to capture exogenous changes to a firm’s competitive environment, I find that competition has a significantly positive effect on the cost of bank debt. Moreover, the analysis reveals that the effect of competition is greater in industries in which small firms face financially strong rivals, in industries with intense strategic interactions between firms, and in illiquid industries. Overall, these findings suggest that banks price financial contracts by taking into account the risk that arises from product market competition.
Keywords: Product Market Competition, Financing Costs, Debt Financing, Financial Contracts
JEL Classification: G32, G34
Suggested Citation: Suggested Citation