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Does foreign competition affect corporate debt maturity structure? Evidence from import penetration
Institution:1. Department of Accounting and Finance, United Arab Emirates University, Al Ain, United Arab Emirates;2. School of Business and Law, Edith Cowan University, Joondalup, WA, Australia;3. Business School, University of Portsmouth, Portsmouth PO1 3DE, United Kingdom;4. Department of economics, University of Genoa, Italy;1. Department of Accounting, East China Normal University, 500 Dongchuan Road, Shanghai 200241, China;2. Alliance Manchester Business School, The University of Manchester, Booth Street West, Manchester M15 6PB, United Kingdom;3. Chulalongkorn Business School, Chulalongkorn University, Phyathai Road, Bangkok 10330, Thailand;1. School of Economics and Management, Beihang University, Beijing 100191, China;2. Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing 100190, China;3. School of Maritime Economics and Management, Dalian Maritime University, Dalian 116026, China
Abstract:This paper examines an unexplored issue of how a firm's competitive environment, proxied by import penetration, affects its debt maturity structure. We document a significant, positive relationship between foreign product competition and the proportion of short-term debt. Our results are robust to a series of sensitivity tests and endogeneity concerns. Utilising large, unexpected reductions in import tariffs as exogenous shocks to foreign competition, we validate the positive effect of import penetration on short-term debt. Our results hold more strongly for firms with high information asymmetry and weak external monitoring. These findings indicate that lenders offer short-term debt to prospective borrowers when they exhibit higher information asymmetry in response to increased foreign competition. Additional tests reveal that short-term debt in a firm's financial structure, contingent upon foreign competition, encourages managers to engage in tax avoidance as an alternative funding source. Our study provides novel evidence of the consequential impact of foreign product competition in debt contracting, giving us insights into its practical implications for corporate strategies and the ramifications of trade liberalisation for policymakers.
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