Competition Laws, External Financing and Investment

We examine the effect of competition laws on external financing and investment decisions around the world. Using a large sample of 21,801 firms across 32 countries, we find a positive association between the stringency of competition laws, and external financing and investment. Our finding is robust to several sensitivity tests, including using alternative measures of external financing and investment, alternative samples and a first-difference change analysis. In cross-sectional analyses, we find that the positive association between the stringency of competition laws and external financing and investment is stronger for financially constrained firms, poorly governed firms, and firms in countries with poorer investor protection and weaker legal enforcement. Collectively, our results support the governance role of intensifying market competition in influencing external financing and investment. Using a sample that covers diverse industries and many countries, our study improves our understanding of the effects of market competition, particularly how variation in institutional settings matters for the success of competition laws and should be of value to policymakers.