Competition and the Cost of Debt
Copyright policy )Competition and the Cost of Debt
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 intensication of product market competition among firms signicantly increases the cost of bank loans. The analysis reveals that the effect is strongest in industries with high illiquidity and specicity 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.
- University of Bern Switzerland
- École Polytechnique Fédérale de Lausanne EPFL Switzerland
- École des Hautes Études Commerciales Morocco
- University of Geneva Switzerland
- French National Centre for Scientific Research France
Cost of debt, [SHS.GESTION.FIN] Humanities and Social Sciences/Business administration/domain_shs.gestion.fin, Competition, Cost, Product market competition, Product Market Competition, 650, Debt, Financial Contracts, Import tariffs, Cost of Debt, Financing Costs, Bank loans, ddc: ddc:650
Cost of debt, [SHS.GESTION.FIN] Humanities and Social Sciences/Business administration/domain_shs.gestion.fin, Competition, Cost, Product market competition, Product Market Competition, 650, Debt, Financial Contracts, Import tariffs, Cost of Debt, Financing Costs, Bank loans, ddc: ddc:650
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