Product Market Competition, Capital Constraints and Firm Growth

We examine the impact of product market competition on quantity-of-capital constraints in 58 countries. Prior work shows that competition increases the costs of debt and equity, which reduce the economic profit from investment. Capital constraints, however, may prevent firms from exploiting all positive NPV projects. Using econometric techniques and unique survey data, we avoid potential endogeneity problems common to the study of both capital constraints and product market competition. We show that product market competition increases capital constraints. Auxiliary analyses suggest that asymmetric information is one mechanism driving this linkage. We also show that quantity-of-capital constraints negatively impact firm growth.