Market pressure and cost of equity: Revisited

•We analyze the non-linear impact of product market competition (PMC) and cost of equity (COE) financing.•The relation between PMC and COE exhibits a U-shape, suggesting that this relation depends on the existing intensity of competitive pressure.•The disciplinary and the risk-increasing effects of PMC can coexist and are not necessarily mutually exclusive. Motivated by the inconclusive evidence on the consequences of industry dynamics and competitive pressure, this study examines the relation between product market competition and cost of equity financing, by considering non-linear effects. Using a large sample of US firms over the 1997–2017 period, we provide evidence of a U-shape non-linear relation between product market competition and cost of equity, implying that this relation depends on the existing intensity of competitive pressure. Our finding suggests that the opposing roles of competition i.e. the disciplinary role and risk-increasing role, can coexist and are not necessarily mutually exclusive.