Product market competition and credit risk

Hsing-Hua Huang, Han-Hsing Lee*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

22 Scopus citations


This study theoretically and empirically investigates effects of product market competition on credit risk. We first develop a real-options-based structural model in a homogeneous oligopoly and show that credit spreads are positively related to the number of firms in an industry. The disparity of firm size in an industry is relevant to both product market competition and credit risk, and we therefore extend the model to an asymmetric duopoly case. In particular, we demonstrate that credit spreads of relatively small (large) firms within an industry are positively (negatively) related to Herfindahl-Hirschman index, and the relative firm size in an industry is an important determinant of credit risk. The models' implications are empirically scrutinized by a reduced-form hazard model and generally supported. By performing out-of-sample analyses, the results demonstrate that firm size together with the interaction terms between intra-industry firm size dummies and competition intensity can effectively predict default.

Original languageEnglish
Pages (from-to)324-340
Number of pages17
JournalJournal of Banking and Finance
Issue number2
StatePublished - 1 Feb 2013


  • Credit risk
  • Hazard model
  • Product market competition
  • Structural model


Dive into the research topics of 'Product market competition and credit risk'. Together they form a unique fingerprint.

Cite this