Bank Competition and Leverage Adjustments

Abstract

We test whether bank competition affects firms’ leverage adjustment speeds. Using Chinese data where bank concentration varies across both years and provinces, we find that underlevered firms move to their target leverage faster when bank competition is high. Tests surrounding an exogenous shock to bank competition lead to the same conclusion. We also find that small firms and nonstate‐owned firms exhibit faster leverage adjustments when bank competition is high, which is consistent with the conjecture that bank risk taking increases with competition.

"Information Asymmetry, Leverage Deviation and Leverage Adjustment Speed "

“…In this regard, they possessed faster adjustment speeds. Öztekin 2015, Halling et al (2016) and Jiang et al (2017) believed that better institutional conditions reduced adjustment costs and increased adjustment speed. Lin et al (2018) stated that under-levered (over-levered) firms have slower (faster) adjustment speeds when compared to other firms.…”

“…Öztekin and Flannery (2012) had also shown that the information environment affects the adjustment speed, thereby accelerating the assumption that information asymmetry reduces the adjustment speed. Other studies such as Öztekin (2015), Halling, Yu and Zechner (2016), and Jiang, Jiang, Huang, Kim and Nofsinger (2017) noted that the adjustment speed may be influenced by macroeconomic factors. Devos, Rahman and Tsang (2017) had categorised adjustment costs into specific opportunity costs and securities issuance costs.…”

Credit supply and capital structure adjustments

“…Finally, the evolution of the Chinese banking system is much different than that in the United States. Overall, my paper is distinct from Jiang et al (2017) in terms of country, banking industry structure and their evolution, measurement of interest variables, companies in the sample, regulatory environment, and methodology.…”

“…However, my paper is different in many important ways. While Jiang et al (2017) use a sample of Chinese firms, my paper covers solely U.S. nonfinancial companies. In addition, they used Chinese banking competition measured as a province level continuous index, I exploit U.S. banking deregulation as an exogenous shock to the credit supply and evaluate the effects on leverage adjustments.…”

“…In order to conserve space, the results are not tabulated, but are available from the author upon request.6 I am aware of one contemporaneous paper byJiang, Jiang, Huang, Kim, and Nofsinger (2017) who investigate the effect of banking competition on leverage…”