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Corporate bankruptcy and banking competition: the effect of financial leverage
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In our recent working paper, we study the effect of a change in banking competition on firms’ bankruptcy rates in the United States.
We know from empirical evidence that banking competition typically decreases interest rates, makes it easier for firms to access bank credit (Boyd and De Nicolo 2005), and leads to economic growth (Jayaratne and Strahan, 1996). Kerr and Nanda (2009) further show that following episodes of banking deregulation, entry and exit of firms increase, reinforcing Schumpeterian competition and increasing firms’ innovativeness (Chava et al. 2013).
However, there are also drawbacks linked to banking competition. Indeed, banking competition could reduce banks charter values, which in turn would decrease incentives to monitor and screen borrowers (Keeley 1990; Hellmann et al. 2000). Furthermore, banking competition might lead to a deterioration of lending rel ....

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