Industry Competition and Bank Lines of Credit

73 Pages Posted: 25 Nov 2014

See all articles by Maggie Rong Hu

Maggie Rong Hu

Chinese University of Hong Kong

Date Written: July 1, 2014

Abstract

Motivated by a debate on the effect of debt on firms’ product market performance, I examine the effect of lines of credit on firms’ future profits. Consistent with the notion that lines of credit provide firms with unique financial flexibility and enhance their strategic position within the industry, I find evidence that the acquisition of lines of credit increases firms’ future profit. This value-enhancing effect is more pronounced in more competitive industries. I also find that for firms in more competitive industries, fewer lines of credit are acquired per firm both in terms of the number and dollar amount of the lines of credit acquired, although the aggregate industry use is higher. Moreover, lines of credit carry less favorable contract terms when the borrowing firms are from more competitive industries in terms of higher loan rates, lower loan amounts and more stringent collateral requirements.

Keywords: Industry competition, line of credit, bank loan

JEL Classification: G20, G21

Suggested Citation

Hu, Maggie Rong, Industry Competition and Bank Lines of Credit (July 1, 2014). Available at SSRN: https://ssrn.com/abstract=2530351 or http://dx.doi.org/10.2139/ssrn.2530351

Maggie Rong Hu (Contact Author)

Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

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