Dr Yafei Zhang 
University of Manchester

Abstract: Forty percent of firms share banks with their industry competitors. We find that firms borrowing from and switching to their competitors’ banks pay lower loan spreads. The impact is stronger when firms are more financially constrained, bank monitoring is less costly, or product market competition is fiercer. After covenant violations when bank monitoring prevails, firms borrowing from competitors’ banks experience faster market share growth, especially in industries with fiercer competitions. Our findings support Bolton and Scharfstein (1990) and suggest that borrowing from a competitor’s bank is an optimal financial arrangement that mitigates agency conflicts and deters product market predation.

Co-authored with Donghang Zhang (University of South Carolina)