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Reports Year : 2010

Competition and the Cost of Debt

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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.
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Dates and versions

hal-00515913 , version 1 (08-09-2010)

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  • HAL Id : hal-00515913 , version 1

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Philip Valta. Competition and the Cost of Debt. 2010. ⟨hal-00515913⟩

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