Corporate Bankruptcy and Banking Competition: The Effect of Financial Leverage
59 Pages Posted: 17 Apr 2021 Last revised: 18 Jun 2021
Date Written: April 13, 2021
We investigate the impact of banking competition on corporate credit risk. Although banking competition does not, on average, affect corporate bankruptcy rates, we find that it causes corporate bankruptcies to increase significantly for high-leverage firms. This effect lasts up to eight years after the increase in banking competition and comes mainly from firms that have high short-term debt. These results suggest that banking competition may lead to tougher credit conditions particularly for firms that are more heavily dependent on the credit market.
Keywords: Banking Competition, Default Risk, Financial Leverage, Syndicated Loans
JEL Classification: G21; G32; G33
Suggested Citation: Suggested Citation