Examining the relationship between product market competition and credit risk

Master's thesis in the field of accounting

Abstract

Identifying and investigating factors affecting credit risk in economic enterprises is very important because it can prevent the occurrence of losses due to failure to pay loans as a result of the banking crisis. Based on this, this research examines the relationship between competition in the product market and credit risk in companies admitted to the Tehran Stock Exchange. In this research, the number of 138 companies admitted to the Tehran Stock Exchange in the period of 2017-2018 has been examined. The logistic regression model was used to test the hypotheses, the research findings show that there is generally a negative and significant relationship between the product market competition index and credit risk, and there is a negative and significant relationship between market competition indicators such as market size and the number of companies active in an industry with credit risk, and there is a positive and significant relationship between product substitutability, market entry costs, and the intensity of industry concentration with credit risk. 

Key words:

Competition in the product market[1], credit risk[2], market size[3]

[1] Competition in the product market

[2] credit risk

[3] Market size

Introduction

Study on how to obtain maximum output from limited resources. The nature of science is financial and economic, and the optimal allocation of limited resources is the goal of this science. Profit, in its simplest expression, is the maximization of the output with respect to certain inputs in the micro and macro economic scale (Abrahimi et al., 2010). Therefore, today, when we talk about risk management, the goal is not to eliminate risk, but to identify and determine the costs caused by it, while risk management itself does not have any meaning.

On the other hand, competitiveness is a process through which each institution tries to perform better than the other and surpass other institutions in order to reduce its risk. At the international level, due to the lack of necessary financial, technical and specialized resources, countries must compete with each other to achieve wealth and benefit the members of their society from prosperity. Therefore, in order to answer the leading research questions and achieve the research goals. In this research, first the statement of the problem, the necessity of conducting the research, the assumptions of the research and finally the scope of the research.

1-1- Description and statement of the problem

Many countries have faced crisis in the last two decades, as a result of which a considerable number of active institutions in the mentioned countries have been forced to stop their activities or restructure. The studies of the world banks show that the occurrence of the mentioned crises has led to the analysis of a significant amount of the financial resources of the countries. The aforementioned crises clarify the importance of explaining the relationship between economic conditions and the health of the debt repayment power of economic banks, because in the era of credit risk, the level of non-current claims has increased greatly (Spinza and Persad [1], 2010). In addition to the above, it is necessary to pay attention to the fact that one of the most important challenges facing the country's banking system in the last few years has been the process of overdue claims. This has become a national challenge due to the fact that the monetary and financial market of the country is bank-oriented and the banks enjoy the majority of the country's liquidity (Behrani, 2019). Facilitation decreases day by day the crediting power of banks and ultimately their income. Meanwhile, the ratio of outstanding claims to facilities in some banks has increased to several times the quorum limit (2%) (Ebrahimi et al., 2019). With regard to the issues raised, it is clear that identifying and investigating the factors affecting credit risk in economic enterprises is of great importance. Because it is possible to prevent the loss of loan defaults due to the banking crisis.

On the other hand, competitiveness is a process that every institution tries to perform better than the other and surpass other institutions. At the international level, due to the lack of necessary financial, technical and specialized resources, countries must compete with each other to achieve wealth and benefit the members of their society from prosperity. Hence, acquiring competitive capabilities in today's world has become one of the basic challenges of different countries at the international level.In order to be competitive, various factors must exist. The most important factors and main indicators of competitiveness at both national and international levels are: 1- Standard of living 2- Trade 3- Productivity 4- Investment The combination of these factors determines the level of competitiveness of a country in the international dimension (Namazi and Ebrahimi, 2013). According to the articles of Merton [2] (1974) and Leland [3] (1994), many credit risk models have shown that the company's capital structure is an important determinant of credit risk. Maivir and Sarkar [4] (2005) and many others clearly show that corporate financing and investment decisions are interdependent. In addition, Grenadier [5] (2002) and Eguror [6] (2009) real models of options to analyze the effect of competition in the product market in the company's investment and operational decisions to create competition in the market have different dimensions, including the most important dimensions of the substitutability of goods, the volume of demand, the amount of necessary investment (investment intensity), the concentration ratio of the industry and the number of companies active in the industry. The first dimension is substitutability. If the substitutability of goods is high, it is said that the product has many similarities with other substitutable products, and these products can be used interchangeably, and in this case, the number of consumers, the number of producers, and the size of the markets, and as a result, the intensity of competition will be greater (Felsan, 2009).

The second dimension is the volume of demand. New competitors are the necessary motivation. The third dimension is barriers to entry, because the resources in the economy are limited, if a large amount of investment in fixed assets is required for competitors to enter, competitors will not have much incentive to enter, because the opportunity cost of investment is high. The fourth dimension is concentration ratio. If the major volume of production and sales (concentration ratio) in industries is limited to one or more players, the intensity of competition in this

| Industries will be less. The last dimension is the number of companies active in each industry. If the number of companies is more, the competition between them will be more (Carona and Pereira, 2008). Several studies on real options have shown that competition in the product market has a significant impact on the investment of companies and operational decisions (Grenadier, 2002; Egoror 2009). Ekdogo and Makai [7] (2012) theoretically and empirically showed that the upper and lower limits of investment can be reasonable when formed in a strategic competitive environment. Research on the effect of competition on other issues of financial indicators of companies is relatively sparse, but recently more attention has been paid to this issue. For example, McKay and Phillips [8] (2005) focused on the financial leverage of the company, Grolon and Micali [9] (2007) investigated the payment policy, Giroud and Mueller (2008) investigated the corporate governance, and Morlek and Nicolo [10] (2009) and Forsard [11] (2010) investigated the cash of the companies. Valetta [12] (2010) investigated how the intensity of competition affects the cost of bank loans and provides evidence that banks rationally calculate industry structure and competition when pricing financial contracts. Huang and Li [13] (2013) investigated the effects of product market competition on credit risk. They showed that credit expansion is positively related to the number of firms in an industry. A high (low) credit spread in an industry has a positive (negative) relationship with the Herfindahl-Hirschman index. And the relative size of the company in an industry is an important determinant of credit risk. Also, they generally found that there is a negative relationship between product market competition and credit risk index. Because the companies that have high competition in the product market, as a result, have a low risk of bankruptcy, accordingly, the credit risk in these companies is reduced. Based on this, credit risk models will create a kind of relative advantage for banks and credit institutions by predicting the losses of non-repayment of loans.