This paper empirically shows that the cost of bank debt is systematically higher for firms that operate in competitive product markets. Using various proxies for product market competition, and reductions of import tariff rates to capture exogenous changes to a firm's competitive environment, I find that competition has a significantly positive effect on the cost of bank debt. Moreover, the analysis reveals that the effect of competition is greater in industries in which small firms face financially strong rivals, in industries with intense strategic interactions between firms, and in illiquid industries. Overall, these findings suggest that banks price financial contracts by taking into account the risk that arises from product market competition.

We study how product-market interactions affect investment. We use reductions of import tariffs to examine how incumbents modify investment when the threat of rivals’ entry intensifies. Incumbents reduce investment by 7.2% in response to higher entry threat. Consistent with a strategic behavior, the investment reduction varies across market structures: it concentrates in markets in which competitive actions are strategic substitutes, where deterring entry is costly and investment makes incumbents look soft. Our results provide novel evidence on how and why firms’ interactions influence corporate investment.

Revaluations of industry peers around horizontal acquisitions are negative when targets are private, but positive when they are public. We posit this “revaluation spread” arises because acquiring managers favor private targets when public firms are overvalued. Targets’ ownership status thus conveys information about industry assets’ misvaluation and triggers predictable revaluations. Supporting this idea, private acquisitions occur when private targets appear “cheaper” than public firms based on valuation multiples or the trading activity of industry insiders. The revaluation spread varies with overall market misvaluation, predicts future industry returns, and is unrelated to peers’ and industries’ fundamentals.

We show that the prospect of a debt renegotiation favorable to shareholders reduces the firm's equity risk. Equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for firms with more shareholder bargaining power relative to debt holders. These relations weaken as the country's insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, equity risk is independent of shareholders' incentives to default strategically. We argue that these findings support the hypothesis that the threat of strategic default can reduce the firm's equity risk.