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Competition and the cost of debt

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  • Valta, Philip
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    Abstract

    This paper empirically shows that the cost of bank debt is systematically higher for firms that operate in competitive product markets. Using various proxies for product market competition, and reductions of import tariff rates to capture exogenous changes to a firm's competitive environment, I find that competition has a significantly positive effect on the cost of bank debt. Moreover, the analysis reveals that the effect of competition is greater in industries in which small firms face financially strong rivals, in industries with intense strategic interactions between firms, and in illiquid industries. Overall, these findings suggest that banks price financial contracts by taking into account the risk that arises from product market competition.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 105 (2012)
    Issue (Month): 3 ()
    Pages: 661-682

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    Handle: RePEc:eee:jfinec:v:105:y:2012:i:3:p:661-682

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Product market competition; Import tariffs; Cost of debt; Bank loans;

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    Cited by:
    1. Kjenstad, Einar & Su, Xunhua, 2012. "Product Market Predatory Threats and the Use of Performance-sensitive Debt," MPRA Paper 44114, University Library of Munich, Germany.
    2. Garcia-Appendini, Emilia, . "The Real Costs of Industry Contagion," Working Papers on Finance 1410, University of St. Gallen, School of Finance.
    3. Waisman, Maya, 2013. "Product market competition and the cost of bank loans: Evidence from state antitakeover laws," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4721-4737.
    4. Teodora Paligorova & Jun Yang, 2014. "Corporate Governance, Product Market Competition and Debt Financing," Working Papers 14-5, Bank of Canada.
    5. Hoxha, Indrit, 2013. "The market structure of the banking sector and financially dependent manufacturing sectors," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 432-444.

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