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Competition and the Cost of Debt

Author

Listed:
  • Philip Valta

    (EPFL - Ecole Polytechnique Fédérale de Lausanne)

Abstract

This paper empirically investigates how the intensity of product market competition affects the cost of debt. Using a large sample of loans to publicly traded US manufacturing rms, I provide evidence that an intensi cation of product market competition among fi rms signi cantly increases the cost of bank loans. The analysis reveals that the effect is strongest in industries with high illiquidity and speci city of assets. This finding indicates that the liquidation value of assets is an important channel through which competition affects the cost of debt. Moreover, I find that loans to firms that operate in more competitive industries contain more covenants restricting the firms financing and dividend policies. Overall, the results suggest that banks explicitly take into account the risk arising from product market competition when pricing and designing debt contracts.

Suggested Citation

  • Philip Valta, 2010. "Competition and the Cost of Debt," Working Papers hal-00515913, HAL.
    • Handle: RePEc:hal:wpaper:hal-00515913
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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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