ProductMarketCompetitionBankruptcy

This study investigates the relationship between product market competition and financial default in private firms. Previous literature offers competing views on how intense competition may affect default, predicting either a positive impact related to an increased business risk or a negative impact related to a disciplinary effect. Investigating a sample of Italian private firms, we provide evidence that firms facing more intense competition are more likely to default. Our results are robust to the use of different competition measures and endogeneity tests. Furthermore, we find that the financial default prediction models containing a competition measure have a higher predictive ability than Altman’s model, even when adding industry fixed effects. The increase in predictive ability is economically significant.