Corporate bankruptcy and banking deregulation: the effect of financial leverage
File(s)
Published version
Author(s)
Cathcart, Lara
Dufour, Alfonso
Rossi, Ludovico
Varotto, Simone
Type
Journal Article
Abstract
We investigate the impact of deregulation-induced banking competition on corporate credit risk. Although banking competition does not, on average, affect corporate bankruptcy rates, we find that it causes corporate bankruptcies to increase significantly for high-leverage firms. We show that higher borrowing costs for high-leverage firms post-deregulation and the resulting credit rationing may be key factors behind our findings. The effect of deregulation lasts for up to seven years after the introduction of deregulation and originates mainly from firms that have high short-term debt and are financially constrained. Our results suggest that banking competition, which is expected to expand lending and reduce its cost, may, in fact, create more challenging credit conditions, particularly for firms that are more heavily dependent on external funding.
Date Issued
2024-09
Date Acceptance
2024-05-19
Citation
Journal of Banking and Finance, 2024, 166
ISSN
0378-4266
Publisher
Elsevier
Journal / Book Title
Journal of Banking and Finance
Volume
166
Copyright Statement
© 2024 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY
license (http://creativecommons.org/licenses/by/4.0/).
license (http://creativecommons.org/licenses/by/4.0/).
License URL
Identifier
https://www.sciencedirect.com/science/article/pii/S0378426624001365
Publication Status
Published
Article Number
107219
Date Publish Online
2024-05-25