Does foreign competition affect corporate debt maturity structure? Evidence from import penetration
International Review of Financial Analysis
School of Business and Law
This paper examines an unexplored issue of how a firm's competitive environment, proxied by import penetration, affects its debt maturity structure. We document a significant, positive relationship between foreign product competition and the proportion of short-term debt. Our results are robust to a series of sensitivity tests and endogeneity concerns. Utilising large, unexpected reductions in import tariffs as exogenous shocks to foreign competition, we validate the positive effect of import penetration on short-term debt. Our results hold more strongly for firms with high information asymmetry and weak external monitoring. These findings indicate that lenders offer short-term debt to prospective borrowers when they exhibit higher information asymmetry in response to increased foreign competition. Additional tests reveal that short-term debt in a firm's financial structure, contingent upon foreign competition, encourages managers to engage in tax avoidance as an alternative funding source. Our study provides novel evidence of the consequential impact of foreign product competition in debt contracting, giving us insights into its practical implications for corporate strategies and the ramifications of trade liberalisation for policymakers.
Atawnah, N., Zaman, R., Liu, J., Atawna, T., & Maghyereh, A. (2023). Does foreign competition affect corporate debt maturity structure? Evidence from import penetration. International Review of Financial Analysis, 86, Article 102539. https://doi.org/10.1016/j.irfa.2023.102539