Local product market competition and bank loans |
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| Institution: | 1. Keck Graduate Institute, Claremont Colleges, 535 Watson Drive, Claremont, CA 91711, United States of America;2. The University of Texas at Dallas, JSOM 14.502, 800 West Campbell Road, Richardson, TX 75080-3021, United States of America;3. Sabanci University, Orta Mahalle Universite Caddesi No: 27, 34956, Tuzla/Istanbul, Turkey;4. University of Memphis, 3675 Central Ave, FAB442, Memphis, TN 38152, United States of America;1. Gabelli School of Business, Fordham University, New York, NY 10023, USA;2. New York University, USA |
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| Abstract: | We investigate the influences of local product market competition on the cost of private debt. Our evidence suggests that the cost of bank loans is significantly higher for firms headquartered in states with greater local product market competition measured by the Herfindahl-Hirschman Index for resident industries. To establish causality, we examine the recognition of the Inevitable Disclosure Doctrine and firm relocations to identify exogenous shocks to local product market competition. We find that the cost of bank loans is lower for firms facing less intense local product market competition after the adoption of IDD and higher for firms relocated to states with more competitive product markets. The results imply that banks value the characteristics of a firm's local product market when approving loan contracts. |
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