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Product market threats and leverage adjustments

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  • Do, Trung K.
  • Huang, Henry Hongren
  • Ouyang, Puman

Abstract

This research examines the effect of product market threats on firms’ leverage adjustments. We find that competitive pressures from the product market accelerate the leverage speed of adjustment (SOA) toward the target capital structure. To establish the causal effect of competitive threats on SOA, we exploit a quasi-natural experiment provided by large import tariff reductions in the U.S. manufacturing sector and show a significant increase in firms’ leverage adjustments after large tariff cuts. The impact of product market threats on leverage adjustments is more pronounced for firms with poor governance quality and exposed to product market threats. Finally, to the extent that reaching the target capital structure enhances firm value, we note that the faster SOA following competition translates into higher firm value. Overall, our study highlights the “bright side” of product market competition and suggests that agency conflicts between managers and shareholders are attenuated by intensified competition.

Suggested Citation

  • Do, Trung K. & Huang, Henry Hongren & Ouyang, Puman, 2022. "Product market threats and leverage adjustments," Journal of Banking & Finance, Elsevier, vol. 135(C).
    • Handle: RePEc:eee:jbfina:v:135:y:2022:i:c:s0378426621003162
    DOI: 10.1016/j.jbankfin.2021.106365
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    More about this item

    Keywords

    Product market threats; Tariff reduction; Leverage Adjustments; SOA;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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