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Product market competition and credit risk

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  • Huang, Hsing-Hua
  • Lee, Han-Hsing
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    Abstract

    This study theoretically and empirically investigates effects of product market competition on credit risk. We first develop a real-options-based structural model in a homogeneous oligopoly and show that credit spreads are positively related to the number of firms in an industry. The disparity of firm size in an industry is relevant to both product market competition and credit risk, and we therefore extend the model to an asymmetric duopoly case. In particular, we demonstrate that credit spreads of relatively small (large) firms within an industry are positively (negatively) related to Herfindahl-Hirschman index, and the relative firm size in an industry is an important determinant of credit risk. The models’ implications are empirically scrutinized by a reduced-form hazard model and generally supported. By performing out-of-sample analyses, the results demonstrate that firm size together with the interaction terms between intra-industry firm size dummies and competition intensity can effectively predict default.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 2 ()
    Pages: 324-340

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:324-340

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Product market competition; Credit risk; Structural model; Hazard model;

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