Ugur, Mehmet ORCID: https://orcid.org/0000-0003-3891-3641, Solomon, Edna M. and Zeynalov, Ayaz (2021) Leverage, competition and financial distress hazard: implications for capital structure in the presence of agency costs. Economic Modelling, 108:105740. ISSN 0264-9993 (doi:10.1016/j.econmod.2021.105740)

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Abstract

Does leverage or product-market competition increase or decrease financial distress risk? The existing literature provides conflicting and largely a-theoretical answers. Drawing on agency theory, we hypothesize that leverage and competition are incentive-alignment mechanisms with non-monotonic and substitute effects on financial distress hazard. Using an unbalanced panel of 13,896 listed firms from 1992-2014 and a multi-level hazard model that takes account of frailty and endogeneity, we find that leverage or competition have a hazard-reducing effect when the discipline effect dominates the agency-cost effect. In contrast, they have a hazard-increasing effect when the discipline effect dominates the agency-cost effect. Furthermore, the level of leverage that minimizes financial distress risk is higher in less competitive industries. Finally, long-term debt is a stronger disciplining device compared to short-term debt; and the financial distress predictors widely used in the literature explain only a small fraction of the distress hazard after controlling for leverage and competition.

Item Type:	Article
Uncontrolled Keywords:	financial distress, competition, leverage, hazard modelling
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Faculty / School / Research Centre / Research Group:	Faculty of Business Faculty of Business > Department of International Business & Economics Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) > Greenwich Political Economy Research Centre (GPERC) Greenwich Business School > Political Economy, Governance, Finance and Accountability (PEGFA)
Related URLs:	Publisher
Last Modified:	02 Dec 2024 16:09
URI:	http://gala.gre.ac.uk/id/eprint/34730

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