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Competition and the Cost of Debt

Author

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  • Philip Valta

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Philip Valta, 2010. "Competition and the Cost of Debt," Post-Print hal-00543615, HAL.
    • Handle: RePEc:hal:journl:hal-00543615
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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