Rivals’ Competitive Activities, Capital Constraints, and Firm Growth
49 Pages Posted: 14 Apr 2015 Last revised: 4 Oct 2018
Date Written: June 23, 2018
We examine the impact of rivals’ competitive activities on firms’ quantity-of-capital constraints in 60 countries. Prior work shows that competition increases the costs of debt and equity, which reduce the economic profit from investment. Capital constraints, however, may prevent firms from exploiting all positive NPV projects. Using unique survey data and several econometric techniques, we address endogeneity problems that affect both capital constraints and rivals’ competitive activities. We find that rivals’ competitive activities are positively associated with firms’ capital constraints and are more strongly correlated with capital constraints than banking sector competition. We also show that quantity-of-capital constraints are negatively related to firm growth, incremental to the cost of capital.
A revised version of this article is now accepted at the Journal of Banking and Finance.
Keywords: capital constraints; financial constraints; credit constraints; access to finance; product market competition; bank competition; credit rationing
JEL Classification: G15, G21, G30
Suggested Citation: Suggested Citation