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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Autores principales: Chengxiao Feng, Zhubo Li, Zhen Peng
Formato: article
Lenguaje:EN
Publicado: SAGE Publishing 2021
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Acceso en línea:https://doaj.org/article/7df55d8cffb045d1a6d5965b9e144a6a
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spelling 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)
institution DOAJ
collection DOAJ
language EN
topic History of scholarship and learning. The humanities
AZ20-999
Social Sciences
H
spellingShingle 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
description 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
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AT zhuboli impactofbankingcompetitiononfirmcreditriskandleverage
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