Product market competition and choice of debt financing: evidence from mergers and acquisitions

Presenter: 
Dr Haekwon Lee
The University of Sydney Business School

Abstract
We investigate how product market competition affects a firm’s choice between private and public debt in financing mergers and acquisitions. We find that acquirers facing intense product market competition prefer private debt, especially for firms in industries with more potential bidders and for firms with lower market share. We also show that higher product market competition increases the cost of private debt, particularly for firms that rely heavily on their relationship lenders, while it has no impact on the cost of public debt. Collectively, these findings suggest that disclosure costs associated with product market competition increase acquirers’ reliance on private over public debt, despite it being relatively more expensive.

Biography
Haekwon’s research interest is in empirical corporate finance. His current research focuses on corporate debt structure. His paper (with Kee Chung and Veljko Fotak) finds that firms rely more on private debt financing over public debt financing in competitive product markets because of high disclosure costs, despite private debt being relatively expensive due to bank’s rent extraction. Another paper (with Veljko Fotak, Feng Jiang, and Erik Lie) documents that while private debt lenders react strongly to the revelation of corporate misbehavior, lenders in public debt market do not, which results in unethical firms increasing their reliance on public debt. Haekwon is also interested in determinants of lending contract design. His paper (with Veljko Fotak and William Megginson) provides evidence that risk from weak property rights institutions have a significant impact on cross-border syndicated lending contracts while the risk can be mitigated by means of Bilateral Investment Treaties.

Light lunch will be served so please advise of any dietary requirements.