The Bright Side of Foreign Competition: Import Penetration and Default Risk

48 Pages Posted: 4 Mar 2020 Last revised: 24 Apr 2020

See all articles by Nader Atawnah

Nader Atawnah

Edith Cowan University - School of Business & Law

Ghasan Baghdadi

RMIT University - School of Economics, Finance and Marketing

Edward Podolski

Deakin University; Financial Research Network (FIRN)

Date Written: April 24, 2020

Abstract

We examine the effect that foreign competition has on firms’ default risk, and document a strong and robust negative association. Utilizing a large sample of public U.S. manufacturing firms and industry-level import penetration data, we find that an increase in import penetration from the 25th to the 75th percentile leads to a reduction in corporate default risk of roughly 15.5%. These results hold after accounting for potential endogeneity concerns. We also document a negative association between import penetration and the incidence of bankruptcy as well as the incidence of covenant violations. Further tests reveal that the negative association between import penetration and default risk is most pronounced for firms that lax managerial oversight, suggesting that foreign competition is a substitute for effective corporate governance. Our paper contributes to the ongoing discourse on the costs and benefits of trade liberalization, documenting the ‘bright side’ of foreign competition.

Keywords: Expected default risk; Foreign competition; Corporate Governance

JEL Classification: G15; G33; G34

Suggested Citation

Atawnah, Nader and Baghdadi, Ghasan and Podolski, Edward, The Bright Side of Foreign Competition: Import Penetration and Default Risk (April 24, 2020). Available at SSRN: https://ssrn.com/abstract=3533497 or http://dx.doi.org/10.2139/ssrn.3533497

Nader Atawnah

Edith Cowan University - School of Business & Law ( email )

Joondalup
Joondalup, WA Perth 6027
Australia
61434436003 (Phone)

Ghasan Baghdadi

RMIT University - School of Economics, Finance and Marketing ( email )

Australia

Edward Podolski (Contact Author)

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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