Bank competition and corporate risk: Firm‐level evidence from BRIC economies

Abstract

AbstractThe study analyzes the potential influence of bank competition on corporate risk‐taking. The study also analyzes the interactive role of firms' dependence on external finance in this framework. We gauge corporate risk through idiosyncratic risk (market‐based measure) and earnings volatility (accounting‐based measure). Analysing firm‐level data for Brazil, Russia, India, and China (BRIC) from 1999 to 2018 through a ‘two‐step dynamic panel system GMM,’ we discover that more (less) competitive (concentrated) banking sectors assist in reducing corporate risk taking. The risk‐reduction effect is specifically stronger for financially dependent and small‐sized firms. The findings remain unchanged when different proxies of financial dependency, banking sector competitiveness, and risk are employed. Further analysis of the ‘transmission mechanism’—the channel by which the extent of banking sector competitiveness influences corporate risk—uncovers that the competitive banking sectors increase firms' access to finance and allow them to operate with lesser financing obstacles.