This paper empirically shows that the cost of bank debt is systematically higher for firms that operate in competitive product markets. Using various proxies for product market competition, and reductions of import tariff rates to capture exogenous changes to a firm's competitive environment, I find that competition has a significantly positive effect on the cost of bank debt. Moreover, the analysis reveals that the effect of competition is greater in industries in which small firms face financially strong rivals, in industries with intense strategic interactions between firms, and in illiquid industries. Overall, these findings suggest that banks price financial contracts by taking into account the risk that arises from product market competition.

International audienceThis paper empirically shows that the cost of bank debt is systematically higher for firms that operate in competitive product markets. Using various proxies for product market competition, and reductions of import tariff rates to capture exogenous changes to a firm's competitive environment, I find that competition has a significantly positive effect on the cost of bank debt. Moreover, the analysis reveals that the effect of competition is greater in industries in which small firms face financially strong rivals, in industries with intense strategic interactions between firms, and in illiquid industries. Overall, these findings suggest that banks price financial contracts by taking into account the risk that arises from product market competition

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent AbstractWe show that the prospect of a debt renegotiation favorable to shareholders reduces the Örmís equity risk. The equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for Örms with more shareholder bargaining power relative to debt holders. These relations weaken as the countryís insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, the equity risk is independent of shareholdersí incentives to default strategically. We argue that these Öndings support the hypothesis that the threat of strategic default can reduce the Örmís equity risk.