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Financial distress and competitors' investment


Garcia, Emilia (2018). Financial distress and competitors' investment. Journal of Corporate Finance, 51:182-209.

Abstract

This paper analyzes whether the financial distress of a firm affects the investment decisions of non-distressed competitors. On average, firms in distress impose indirect costs to non-distressed competitors by increasing costs of credit in the industry and hence restricting credit access and investment. These average negative effects continue to hold in the absence of industry downturns and are temporary. However, negative effects are mitigated for firms with stronger balance sheets or in concentrated markets, suggesting that firms with strong balance sheets prey on their weaker rivals to improve their market position.

Abstract

This paper analyzes whether the financial distress of a firm affects the investment decisions of non-distressed competitors. On average, firms in distress impose indirect costs to non-distressed competitors by increasing costs of credit in the industry and hence restricting credit access and investment. These average negative effects continue to hold in the absence of industry downturns and are temporary. However, negative effects are mitigated for firms with stronger balance sheets or in concentrated markets, suggesting that firms with strong balance sheets prey on their weaker rivals to improve their market position.

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4 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Business and International Management
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Social Sciences & Humanities > Strategy and Management
Language:English
Date:2018
Deposited On:14 Dec 2018 07:38
Last Modified:29 Jul 2020 08:28
Publisher:Elsevier
ISSN:0929-1199
OA Status:Closed
Publisher DOI:https://doi.org/10.1016/j.jcorpfin.2018.06.003
Other Identification Number:merlin-id:16999

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