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

Critical Finance Review, Forthcoming.

55 Pages Posted: 21 May 2024

See all articles by Nader Atawnah

Nader Atawnah

United Arab Emirates University (UAEU) - College of Business and Economics

Ghasan Baghdadi

La Trobe University - La Trobe Business School - Department of Finance

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Edward J. Podolski

Deakin University - Department of Finance

Date Written: December 12, 2022

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 3%. These results hold after accounting for potential endogeneity concerns. Additional tests reveal that the reduction in default risk is attributable to import penetration reducing idiosyncratic decision making within firms, as well as inducing safer yet more myopic investments. Our results contrast with those of Platt (2020), who shows that the competitive environment increases the cost of debt. We argue that model selection is crucial in studies on the causal effects of competition, with more restrictive models to be preferred due to significant endogeneity concerns.

Keywords: Expected default risk; foreign competition; corporate governance

JEL Classification: G15; G33; G34

Suggested Citation

Atawnah, Nader and Baghdadi, Ghasan and Duong, Huu Nhan and Podolski, Edward J., The Bright Side of Foreign Competition: Import Penetration and Default Risk (December 12, 2022). Critical Finance Review, Forthcoming. , Available at SSRN: https://ssrn.com/abstract=4828597

Nader Atawnah (Contact Author)

United Arab Emirates University (UAEU) - College of Business and Economics ( email )

Al-Ain, POB 17555
United Arab Emirates

Ghasan Baghdadi

La Trobe University - La Trobe Business School - Department of Finance ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

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

HOME PAGE: http://www.firn.org.au

Edward J. Podolski

Deakin University - Department of Finance

75 Pigdons Road
Victoria, Victoria 3216
Australia

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