Bank competition and corporate risk: Firm-level evidence from BRIC economies

The study analyzes the potential influence of bank competition on corporate risk-taking. The study also analyzes the interactive role of firms' dependence on external finance in this framework. We gauge corporate risk through idiosyncratic risk (market-based measure) and earnings volatility (accounting-based measure). Analysing firm-level data for Brazil, Russia, India, and China (BRIC) from 1999 to 2018 through a 'two-step dynamic panel system GMM,' we discover that more (less) competitive (concentrated) banking sectors assist in reducing corporate risk taking. The risk-reduction effect is specifically stronger for financially dependent and small-sized firms. The findings remain unchanged when different proxies of financial dependency, banking sector competitiveness, and risk are employed. Further analysis of the 'transmission mechanism'-the channel by which the extent of banking sector competitiveness influences corporate risk-uncovers that the competitive banking sectors increase firms' access to finance and allow them to operate with lesser financing obstacles.