Product Market Competition and Financial Decisions During a Financial Crisis

We find that, in the presence of the “flight to quality” during the 2007-2008 financial crisis, firms that depended less on external financing (or internal finance dependent firms) prior to the crisis were able to secure additional financing and increased investments, while external finance dependent firms significantly contracted their external financing and investments. Internal finance dependent firms' increased investments during the crisis were associated with higher market share growth, while external finance dependent competitors lost their market share. Moreover, the increased investments and market share growth of internal finance dependent firms during the crisis were pronounced in competitive industries and among firms with similar products. The results indicate that firms' financial decisions during the financial crisis are interrelated with their product market dimensions