Competition and debt conservatism

Exploiting the staggered changes in national competition laws, we find that competition is conducive to zero leverage, especially for financially constrained firms. Competition increases firms’ cash savings from cash flows and does not lead to higher constraints and less payout. In event time, zero leverage is accompanied by increases in cash, payout, and equity issuance, and such increases in cash are partly due to changes in competition. A duration analysis on a subsample where firms deleverage for financial flexibility shows that zero leverage occurs sooner when competition increases. Overall, competition induces firms to use zero leverage to restore financial flexibility.