Product Market Competition and Financial Decisions During a Financial Crisis

Abstract

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 (IFD) firms) prior to the crisis were able to secure additional financing and increased investments, while external finance dependent (EFD) firms significantly contracted their external financing and investments. IFD firms’ increased investments during the crisis were associated with higher market share growth, while EFD competitors lost their market share. The results indicate that firms’ financial decisions during the financial crisis are interrelated with their product market dimensions.

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