Bank competition and the cost of debt: the role of state ownership and firm size

ABSTRACT

The argument on the puzzling relationship between bank competition and the cost of debt remains inconclusive as the effects of state ownership and firm size are intertwined. We find that bank competition is negatively associated with the cost of debt and observe that the negative effect of bank competition is stronger for state-owned enterprises (SOEs) and weaker for large-sized enterprises. Our findings accord with the market power hypothesis. State ownership strengthens the negative impact of bank competition on the cost of debt, but firm size tends to weaken it. SOEs and large-sized enterprises are associated with a lower cost of debt compared to non-SOEs and small- and medium-sized enterprises, respectively.

KEYWORDS:

• Bank competition
• state-owned banks
• cost of debt
• state ownership

JEL CLASSIFICATION:

• D43
• G21
• M41

Acknowledgement

The authors would like to sincerely thank Jie Zhang and Ji Huang for their valuable suggestions and the financial support from China Scholarship Council.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

The project was supported by Graduate Scientific Research and Innovation Foundation of Chongqing, China [grant no.CYB16002].