Debt choice in the regulated competition era

Abstract

We examine the impact of intensifying competition laws on corporate debt financing choice. Analogous to the argument that intensifying competition spurs improvements in corporate governance, which decreases the demand for bank monitoring and hence bank debt, we find a negative association between stringent competition laws and bank debt reliance. This effect is amplified for firms with lower information quality, firms in concentrated industries, and firms in countries with weaker institutional environments. Additional analyses show that the bank debt-reducing effect of competition increases overall firm value, which demonstrate the value-enhancing effect of regulated competition. Our study is contributory to the recent debate on reforming competition laws to promote economic growth.