This paper empirically investigates how the intensity of product market compe-tition affects the cost of debt. Using a large sample of loans to publicly traded US manufacturing firms, I provide evidence that an intensifcation of product market com-petition among firms significantly increases the cost of bank loans. The analysis reveals that the effect is strongest in industries with a high illiquidity and specificity of assets.
Moreover, I find that loans to firms that operate in more competitive industries con-tain more covenants restricting the firms’financing and dividend policies. Overall, the results suggest that banks explicitly take into account the risk arising from product market competition when pricing and designing debt contracts.