Competition and the Cost of Debt

Valta, Philip

doi:10.2139/ssrn.1492670

Cited by 70 publications

(167 citation statements)

References 68 publications

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“…We define tax‐based competition as the strategic interactions and responses by firms to the tax choices and attributes of their competitors. Although tax‐based competition is not a unique form of competition, we argue that taxes can provide a channel that shapes competition, similar to how some firms' labor cost advantages affect the choices of rivals (Bernard et al ; Valta ; Flammer ). In our setting specifically, we focus on tax‐based competition pertaining to organizational form choice as a mechanism that affects how competitors' income is taxed.…”

Section: Introductionmentioning

confidence: 79%

The Effects of Competition from S Corporations on the Organizational Form Choice of Rival C Corporations

Donohoe

Lisowsky

Mayberry

2019

Contemporary Accting Res

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Subchapter C of the U.S. Internal Revenue Code levies an entity‐level tax on corporate profits, whereas Subchapter S allows corporations meeting specific criteria to elect out of this tax. Despite these differences, C and S corporations regularly compete for customers and capital. We examine whether and the extent to which competition from S corporations influences the future organizational form choice of rival C corporations and explore outcomes of this choice. Using data for 4,462 private U.S. commercial banks grouped by Metropolitan Statistical Area during 1997–2010, we find that greater competition from S corporation banks increases the likelihood that rival C corporation banks convert to Subchapter S status. We estimate that the aggregate first‐year tax savings from S conversion exceed $372 million. Consistent with these savings being used to maintain competitive parity with rivals, we find that converting banks increase their interest rates on customer deposits and advertising intensity. Our findings provide insight into whether competition from tax‐advantaged firms influences the organizational form choice of rival tax‐disadvantaged firms.

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Section: Introductionmentioning

confidence: 79%

The Effects of Competition from S Corporations on the Organizational Form Choice of Rival C Corporations

Donohoe

Lisowsky

Mayberry

2019

Contemporary Accting Res

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“…In addition, a series of papers that use tariff cuts to instrument for import competition have found that they affect firms' capital budgeting decisions (Fresard (), Bloom, Draca, and Van Reenen (), Frésard and Valta ()) and capital structure (Valta (), Xu ()).…”

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confidence: 99%

The Globalization Risk Premium

Barrot¹,

Loualiche²,

Sauvagnat

2019

The Journal of Finance

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In this paper, we investigate how globalization is reflected in asset prices. We use shipping costs to measure firms' exposure to globalization. Firms in low shipping cost industries carry a 7% risk premium, suggesting that their cash flows covary negatively with investors' marginal utility. We find that the premium emanates from the risk of displacement of least efficient firms triggered by import competition. These findings suggest that foreign productivity shocks are associated with times when consumption is dear for investors. We discuss conditions under which a standard model of trade with asset prices can rationalize this puzzle.RECENT DECADES HAVE BEEN CHARACTERIZED by a high degree of trade integration. This era of globalization 1 is generally seen in a positive light, as it has been associated with more product variety at lower prices, cheaper intermediate goods, and greater access for U.S. firms to foreign markets. 2 Yet globalization also makes domestic economies more sensitive to foreign shocks. A salient * Jean-Noël Barrot is with HEC Paris and CEPR. Erik Loualiche is with the University of Minnesota, Carlson School of Management. Julien Sauvagnat is with Bocconi University and CEPR. For helpful comments, the authors thank Stefan Nagel (the Editor); Nick Bloom; Maria Cecilia Bustamante (discussant); Bernard Dumas (discussant); Nicola Gennaioli; Matthieu Gomez; Pierre-Olivier Gourinchas; Tarek Hassan (discussant); Christian Julliard; Matteo Maggiori (discussant); Jonathan Parker; Carolin Pflueger; Thomas Philippon; Nick Roussanov (discussant); Chris Telmer (discussant); Adrien Verdelhan; Michael Weber (discussant); anonymous referees; and seminar participants at MIT Sloan, SED annual meetings 1 σ J −1 . 24 We show formally in Internet Appendix Section I.A that the consumption index is C J = ( J c J (ϕ) σ J −1 σ J dϕ) σ J σ J −1 and the price index is P J = ( J p J (ϕ) 1−σ J dϕ) 1 1−σ J .We show that average profits of firms' domestic operations are π D,J (φ D,J ) and average profits for exporting operations are π X,J (φ X,J ). We define the fraction of firms that decide to export as ζ J = Pr{ϕ > ϕ X,J }. Finally, we express the profits of domestic firms from all their operations asEquilibrium: The aggregate budget constraint can be expressed in terms of the final composite consumption good, C, the aggregate price index, P, and the revenues of firms flowing back to households, , such that in each country we have PC ≤ L + .Under financial autarky, as is the case in Ghironi and Melitz (2005), households only receive the proceeds of domestic firms' operations, such that AUT = J J . Under perfect risk-sharing, households receive a share of world industry profits relative to their capital endowments, RS = J M J M J +M J

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“…Comprehensive surveys of exposure (Bartram and Bodnar, ) do not furnish any empirical evidence that firms’ financial constraints affect their exposure, although recent work indicates that exposure increases with aggregate credit constraints (Bergbrant and Hunter, ) and is higher for financially distressed firms (Starks and Wei, ). In addition, the empirical literature is also silent as to whether customs and foreign trade regulations affect exposure, although how foreign trade is regulated could influence the level of competition domestic firms face from foreign producers (Valta, ). We find that exposure is higher for firms that report that these regulations are an obstacle to their operations.…”

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confidence: 99%

“…The power of our tests is likely due to the fact that we use measures of competition that reflect the actual competition individual firms face and the fact that we have a measure of exposure that is gross of any hedging actions. A small body of work highlights the importance of competition for different aspects of firm operations including cash flows, stock returns (Gaspar and Massa, ; Hou and Robinson, ; Irvine and Pontiff, ; Hoberg and Phillips, ; Peress, ), trade credit (Fisman and Raturi, ), and the cost of capital (Valta, ). Considering the evidence that competition is a dominant determinant of exposure and given the magnitude of the potential impact of exchange rate changes on both domestic and foreign‐involved firms, our paper extends this work in an important new dimension .…”

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confidence: 99%

Firm‐Level Competition and Exchange Rate Exposure: Evidence from a Global Survey of Firms

Bergbrant¹,

Campbell²,

Hunter

2014

Financial Management

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We examine the effect of competition on exchange rate exposure using survey data from 55 countries. We find that exposure increases with the intensity of competition. Exposure is higher when firms face price competition in international and domestic product markets and when rivals compete using an unfair financial advantage. Furthermore, competition is a leading determinant of exposure, dominating the usual determinants. Exposure also increases with several determinants not previously empirically examined, such as firm-level financial constraints. These results hold for small, large, foreign-involved, and purely domestic firms. Finally, import-only firms have higher exposure than export-only firms. Our survey results are likely to capture exposure before firms' hedging actions.

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Competition and the Cost of Debt

Cited by 70 publications

References 68 publications

The Effects of Competition from S Corporations on the Organizational Form Choice of Rival C Corporations

The Effects of Competition from S Corporations on the Organizational Form Choice of Rival C Corporations

The Globalization Risk Premium

Firm‐Level Competition and Exchange Rate Exposure: Evidence from a Global Survey of Firms

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