The Impact of Banking Competition on Firm Credit Risk and Leverage
A firm’s default risk is closely related to its macrofinancial stability. As financial reform deepens, banking competition may ease firms’ credit constraints, encouraging them to increase their leverage and default risks. This study uses contingent claims analysis to examine firms’ asset–liability r...
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2021
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oai:doaj.org-article:7df55d8cffb045d1a6d5965b9e144a6a2021-12-02T02:05:13ZThe Impact of Banking Competition on Firm Credit Risk and Leverage2158-244010.1177/21582440211061529https://doaj.org/article/7df55d8cffb045d1a6d5965b9e144a6a2021-11-01T00:00:00Zhttps://doi.org/10.1177/21582440211061529https://doaj.org/toc/2158-2440A firm’s default risk is closely related to its macrofinancial stability. As financial reform deepens, banking competition may ease firms’ credit constraints, encouraging them to increase their leverage and default risks. This study uses contingent claims analysis to examine firms’ asset–liability ratio and default distance. We find that companies have low leverage and low overall default risks. Moreover, a pro-cyclical effect exists between leverage and economic growth. As banking competition becomes more intense, the default risk decreases, but firms’ leverage ratio rises significantly. The impact is more prominent for highly leveraged firms. Our findings also indicate that utilizing the contingent claims analysis method to measure firms’ leverage and default risks provides more accurate results. Moreover, we provide empirical evidence of the impact of banking competition on firms’ leverage and credit risks. The results suggest that enhancing financial competition has a positive effect on easing credit constraints and reducing default risks.Chengxiao FengZhubo LiZhen PengSAGE PublishingarticleHistory of scholarship and learning. The humanitiesAZ20-999Social SciencesHENSAGE Open, Vol 11 (2021) |
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History of scholarship and learning. The humanities AZ20-999 Social Sciences H |
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History of scholarship and learning. The humanities AZ20-999 Social Sciences H Chengxiao Feng Zhubo Li Zhen Peng The Impact of Banking Competition on Firm Credit Risk and Leverage |
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A firm’s default risk is closely related to its macrofinancial stability. As financial reform deepens, banking competition may ease firms’ credit constraints, encouraging them to increase their leverage and default risks. This study uses contingent claims analysis to examine firms’ asset–liability ratio and default distance. We find that companies have low leverage and low overall default risks. Moreover, a pro-cyclical effect exists between leverage and economic growth. As banking competition becomes more intense, the default risk decreases, but firms’ leverage ratio rises significantly. The impact is more prominent for highly leveraged firms. Our findings also indicate that utilizing the contingent claims analysis method to measure firms’ leverage and default risks provides more accurate results. Moreover, we provide empirical evidence of the impact of banking competition on firms’ leverage and credit risks. The results suggest that enhancing financial competition has a positive effect on easing credit constraints and reducing default risks. |
format |
article |
author |
Chengxiao Feng Zhubo Li Zhen Peng |
author_facet |
Chengxiao Feng Zhubo Li Zhen Peng |
author_sort |
Chengxiao Feng |
title |
The Impact of Banking Competition on Firm Credit Risk and Leverage |
title_short |
The Impact of Banking Competition on Firm Credit Risk and Leverage |
title_full |
The Impact of Banking Competition on Firm Credit Risk and Leverage |
title_fullStr |
The Impact of Banking Competition on Firm Credit Risk and Leverage |
title_full_unstemmed |
The Impact of Banking Competition on Firm Credit Risk and Leverage |
title_sort |
impact of banking competition on firm credit risk and leverage |
publisher |
SAGE Publishing |
publishDate |
2021 |
url |
https://doaj.org/article/7df55d8cffb045d1a6d5965b9e144a6a |
work_keys_str_mv |
AT chengxiaofeng theimpactofbankingcompetitiononfirmcreditriskandleverage AT zhuboli theimpactofbankingcompetitiononfirmcreditriskandleverage AT zhenpeng theimpactofbankingcompetitiononfirmcreditriskandleverage AT chengxiaofeng impactofbankingcompetitiononfirmcreditriskandleverage AT zhuboli impactofbankingcompetitiononfirmcreditriskandleverage AT zhenpeng impactofbankingcompetitiononfirmcreditriskandleverage |
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