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Leverage, Competition, and Financial Distress Hazard: Non-Monotonic Effects in the Presence of Agency Costs

Author

Listed:
  • Ugur, Mehmet
  • Solomon, Edna
  • Zeynalov, Ayaz

Abstract

This paper investigates the effects of leverage and product-market competition on financial distress in the presence of agency costs. We demonstrate that leverage and competition have non-monotonic and substitute disciplining effects on managerial slack and financial distress hazard. We take account of potential endogeneity due to the correlation of frailty with the regressors and conduct a wide range of sensitivity checks. Our approach bridges the gap between theory and empirics, offers new avenues for financial distress modelling, and can be applied to other event histories such as corporate defaults or credit downgrades.

Suggested Citation

  • Ugur, Mehmet & Solomon, Edna & Zeynalov, Ayaz, 2020. "Leverage, Competition, and Financial Distress Hazard: Non-Monotonic Effects in the Presence of Agency Costs," Greenwich Papers in Political Economy 28304, University of Greenwich, Greenwich Political Economy Research Centre.
    • Handle: RePEc:gpe:wpaper:28304
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    File URL: http://gala.gre.ac.uk/id/eprint/28304/1/28304%20UGUR_Leverage%2C%20Competition%2C%20and%20Financial%20Distress%20Hazard_2020.pdf
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    More about this item

    Keywords

    Financial distress; competition; leverage; hazard modelling;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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