Competition and financial constraints: a two-sided story

This paper examines the relation between competitive pressure and financial constraints using firm-level survey data from 27 emerging economies of Eastern Europe and Central Asia for the years 2005 and 2009. In the empirical analysis, we disentangle the impact of product market competition on the demand and supply of credit. Our results support the hypothesis that competitive pressure on borrowers affects both sides of the credit market. We find that in industries with greater competitive pressure firms’ demand for credit is typically higher but a greater proportion of firms are discouraged from loan application due to greater cost of credit. Interestingly, we find the detrimental effect of competitive pressure on credit access breaks down when firms are audited, they can pledge collateral and when they engage in export activities. These results point to the role of competitive pressure into the lenders’ information set when limited information is available.