The relationship between competitive structures in the market and credit risk in Tehran stock exchange companies

Dissertation for Master's degree (M.A)

Trend: Accounting

Abstract

Competition in the product market has a significant impact on the investment of companies and operational decisions and theoretically indicates the upper and lower limits of investment in an economic enterprise. This will result in adverse consequences such as decreasing market efficiency, increasing transaction costs, market weakness, low liquidity and, in general, decreasing profit from transactions in the capital markets. Based on this, this research examines the relationship between competitive structures in the 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. In order to test the hypotheses, the logistic regression model was used, the research findings show that in general there is a negative and significant relationship between competitive structures in the market and credit risk, and there is a negative and significant relationship between the indicators of competitive structures in the market 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 the substitutability of goods, market entry costs and the intensity of industry concentration with credit risk. 

Key words:

Competitive structures, market size, credit risk

Introduction

The study of how to obtain the maximum output from limited resources is the nature of financial and economic sciences, and the optimal allocation of limited resources is the goal of this science. Profit, in its simplest expression, is the maximization of output with respect to certain inputs in micro and macro economic scales (Ebrahimi et al., 2010). On the other hand, any action to improve and improve the efficiency of the banking system will improve the flow of savings, investment and allocation of resources, and the potential, scattered and latent facilities in the country will be used for progress and public welfare. One of the most important topics in the banking industry is the topic of profit and risk. Wherever the future is unknown, there is risk. Therefore, those who can create a secure future for themselves and their organization can increase their knowledge with proper planning and analysis (Khosh Sima and Shahiki, 2011). Therefore, today, when we talk about risk management, the goal is not to eliminate risk, but rather to identify and determine the costs caused by it, while risk management alone does not have any meaning. Accordingly, competitiveness is a process through which every 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.

1-2- Description and statement of the problem

Many countries have faced crisis in the last two decades, as a result of which a significant 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 as a result of the banking crisis.

On the other hand, competitiveness is a process through which 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) created real options models to analyze the effect of product market competition on company investment and operational decisions. Several studies on real options have shown that competition in the product market has a significant impact on corporate investment 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. Measuring credit risk can provide the possibility of asset pricing by establishing a rational relationship between risk and return. Also, examining the credit risk will provide the possibility of optimizing the composition of the credit portfolio and determining the economic capital of banks to reduce capital costs (Mueller, 2008). Accordingly, considering that a greater share of the economy of developing countries is reflected in the banking industry, and also considering that the increase in the credit risk of companies has led to a decrease in the share of income in this industry, so after studying various researches, we found that one of the factors affecting the credit risk of economic units is competition in the product market.