Leverage, Banking Competition and SMEs Financial Stability. Evidence from the Italian Provinces

This work examines the relationship between leverage and SMEs’ financial stability, evaluating whether and to what extent this link is affected by the degree of competition characterising the local credit market in which firms operate. Using the H-statistic as a measure of local banking competition, my evidence shows that the negative impact of leverage on firms’ financial health is greater for firms operating in more competitive banking markets. Indeed, the drawbacks of increasing banking competition seem to prevail on their expected advantages, leading banks to be less inclined to establish lending relationships with risky firms, thus increasing their financial vulnerability.