Rivals’ competitive activities, capital constraints, and firm growth

• Published in: Journal of banking & finance Vol. 97; pp. 87 - 108
• Main Authors: Bergbrant, Mikael C., Hunter, Delroy M., Kelly, Patrick J.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-12-2018
• Subjects: Banking competition; Capital constraints; Competitive activities; Cost of capital; Credit rationing; Firm growth; Product market competition; Credit rationing; Capital constraints; Product market competition; Banking competition; G20; Cost of capital; G21; G01; Competitive activities; Firm growth
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2018.09.020

We examine the impact of rivals’ competitive activities on firms’ quantity-of-capital constraints in 60 countries. Prior work shows that competition increases the costs of debt and equity, which reduce the economic profit from investment. Capital constraints, however, may prevent firms from exploiting all positive NPV projects. Using unique survey data and several econometric techniques, we address endogeneity problems that affect both capital constraints and rivals’ competitive activities. We find that rivals’ competitive activities are positively associated with firms’ capital constraints and are more strongly correlated with capital constraints than banking sector competition. We also show that quantity-of-capital constraints are negatively related to firm growth, incremental to the cost of capital.