IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v29y2014icp358-371.html
   My bibliography  Save this article

Capital structure and competitive position in product market

Author

Listed:
  • Mitani, Hidetaka

Abstract

This paper examines the effect of capital structure on the competitive position of firms in the product market, as measured by the market share. Theoretical predictions suggest that this effect depends on whether Cournot or Bertrand competition determines firms' interactions. We present evidence that leverage affects market share positively under both types of competitions. This evidence supports the prevailing version of the limited liability effect of debt financing. Alternatively, we demonstrate that a firm's competitive position is important in determining its choice of capital structure.

Suggested Citation

  • Mitani, Hidetaka, 2014. "Capital structure and competitive position in product market," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 358-371.
    • Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:358-371
    DOI: 10.1016/j.iref.2013.06.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056013000634
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2013.06.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 1-24, March.
    2. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-653, June.
    3. Sundaram, Anant K. & John, Teresa A. & John, Kose, 1996. "An empirical analysis of strategic competition and firm values The case of R&D competition," Journal of Financial Economics, Elsevier, vol. 40(3), pages 459-486, March.
    4. Kovenock, Dan & Phillips, Gordon M, 1997. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 767-803.
    5. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
    6. Kuan, Tsung-Han & Li, Chu-Shiu & Liu, Chwen-Chi, 2012. "Corporate governance and cash holdings: A quantile regression approach," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 303-314.
    7. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    8. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    9. Andrews,Donald W. K. & Stock,James H. (ed.), 2005. "Identification and Inference for Econometric Models," Cambridge Books, Cambridge University Press, number 9780521844413.
    10. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-366, May.
    11. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    12. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
    13. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    14. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    15. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    16. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    17. Harris, Milton & Raviv, Artur, 1991. "The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    18. Titman, Sheridan, 1984. "The effect of capital structure on a firm's liquidation decision," Journal of Financial Economics, Elsevier, vol. 13(1), pages 137-151, March.
    19. Maksimovic, Vojislav & Zechner, Josef, 1991. "Debt, Agency Costs, and Industry Equilibrium," Journal of Finance, American Finance Association, vol. 46(5), pages 1619-1643, December.
    20. Cragg, John G. & Donald, Stephen G., 1993. "Testing Identifiability and Specification in Instrumental Variable Models," Econometric Theory, Cambridge University Press, vol. 9(2), pages 222-240, April.
    21. Laurent Fresard, 2010. "Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings," Journal of Finance, American Finance Association, vol. 65(3), pages 1097-1122, June.
    22. Evgeny Lyandres, 2006. "Capital Structure and Interaction among Firms in Output Markets: Theory and Evidence," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2381-2422, September.
    23. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sultan Sikandar Mirza & Tanveer Ahsan & Raheel Safdar & Ajid Ur Rehman, 2020. "Competition, Debt Maturity, and Adjustment Speed in China: A Dynamic Fractional Estimation Approach," JRFM, MDPI, vol. 13(5), pages 1-17, May.
    2. Ma, Jie & Wang, Leonard F.S. & Sun, Ji, 2022. "Cross Ownership, Loan Commitment, Managerial Delegation and the “Prisoner’s Dilemma”," MPRA Paper 115237, University Library of Munich, Germany, revised 02 Nov 2022.
    3. Zaheer Anwer & Shamsher Mohamad & Wajahat Azmi & Akram Shavkatovich Hasanov, 2022. "Product market fluidity and religious constraints: evidence from the US market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1761-1817, April.
    4. Jine Qian & Qiang Gong & Leonard F.S. Wang, 2021. "Corporate social responsibility, loan commitment, and social welfare in network duopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 952-960, June.
    5. Hung, Dang Ngoc, 2022. "The Impact Of Capital Structure On The Enterprise Value: Approaching By Threshold Regression," OSF Preprints rf2mc, Center for Open Science.
    6. Babar, Md. & Habib, Ahsan, 2021. "Product market competition in accounting, finance, and corporate governance: A review of the literature," International Review of Financial Analysis, Elsevier, vol. 73(C).
    7. Insung Son & Sihyun Kim, 2022. "Supply Chain Management Strategy and Capital Structure of Global Information and Communications Technology Companies," Sustainability, MDPI, vol. 14(3), pages 1-13, February.
    8. Carlos Otávio Senff & Claudineia Kudlawicz-Franco & Tatiana Marceda Bach & Luana Marine Padilha & Claudimar Da Veiga & Luiz Carlos Duclós, 2016. "Are Competitive Positioning and Quality of Administration Related to the Continuity?," Asian Social Science, Canadian Center of Science and Education, vol. 12(9), pages 209-209, September.
    9. Agarwal, Manoj K. & Ma, Zecong & Park, Chang Hee & Zheng, Yilong, 2022. "The impact of a manufacturer’s financial liquidity on its market strategies and pricing and promotion decisions in retail grocery markets," Journal of Business Research, Elsevier, vol. 142(C), pages 844-857.
    10. Nguyen Tan Vinh, 2020. "The Impact of Competition on Debt Ratio of Manufacturing Enterprises in Vietnam," Journal of Management and Sustainability, Canadian Center of Science and Education, vol. 9(2), pages 1-56, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xu, Jin, 2012. "Profitability and capital structure: Evidence from import penetration," Journal of Financial Economics, Elsevier, vol. 106(2), pages 427-446.
    2. Guney, Yilmaz & Li, Ling & Fairchild, Richard, 2011. "The relationship between product market competition and capital structure in Chinese listed firms," International Review of Financial Analysis, Elsevier, vol. 20(1), pages 41-51, January.
    3. T. Franck & N. Huyghebaert, 2004. "On the Interactions between Capital Structure and Product Markets.A Survey of the Literature," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 727-787.
    4. Larkin, Yelena, 2013. "Brand perception, cash flow stability, and financial policy," Journal of Financial Economics, Elsevier, vol. 110(1), pages 232-253.
    5. Jianjun Miao, 2005. "Optimal Capital Structure and Industry Dynamics," Journal of Finance, American Finance Association, vol. 60(6), pages 2621-2659, December.
    6. Abdulaziz Istaitieh & José M. Rodríguez‐Fernández, 2006. "Factor‐product markets and firm's capital structure: A literature review," Review of Financial Economics, John Wiley & Sons, vol. 15(1), pages 49-75.
    7. Bandyopadhyay, Arindam & Barua, Nandita Malini, 2016. "Factors determining capital structure and corporate performance in India: Studying the business cycle effects," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 160-172.
    8. Le Pape, Nicolas, 2001. "Endettement des firmes et comportements de rivalité : l’apport des principaux modèles en économie industrielle," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(2), pages 281-302, juin.
    9. Lyandres, Evgeny, 2010. "Target leverage and the costs of issuing seasoned equity," Finance Research Letters, Elsevier, vol. 7(1), pages 39-52, March.
    10. de Jong, A. & Nguyen, T.T. & van Dijk, M.A., 2007. "Strategic Debt: Evidence from Bertrand and Cournot Competition," ERIM Report Series Research in Management ERS-2007-057-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    11. Rosellon Cifuentes, M.A., 1999. "Essays on financial policy, liquidation values and product markets," Other publications TiSEM 802f644e-3e93-4815-bf33-8, Tilburg University, School of Economics and Management.
    12. Istaitieh, Abdulaziz & Rodriguez-Fernandez, Jose M., 2006. "Factor-product markets and firm's capital structure: A literature review," Review of Financial Economics, Elsevier, vol. 15(1), pages 49-75.
    13. Indrani Chakraborty, 2020. "Debt financing and market concentration in an emerging economy: firm-level evidence from India," Economic Change and Restructuring, Springer, vol. 53(3), pages 451-474, August.
    14. Federico Etro, 2010. "Endogenous market structures and the optimal financial structure," Canadian Journal of Economics, Canadian Economics Association, vol. 43(4), pages 1333-1352, November.
    15. Kedia, Simi, 2006. "Estimating product market competition: Methodology and application," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 875-894, March.
    16. Sumit K. Majumdar & Rabih Moussawi & Ulku Yaylacicegi, 2018. "Capital Structure and Mergers: Retrospective Evidence from a Natural Experiment," Journal of Industry, Competition and Trade, Springer, vol. 18(4), pages 449-472, December.
    17. Winston Wei Dou & Yan Ji, 2021. "External Financing and Customer Capital: A Financial Theory of Markups," Management Science, INFORMS, vol. 67(9), pages 5569-5585, September.
    18. Ferrés, Daniel & Ormazabal, Gaizka & Povel, Paul & Sertsios, Giorgo, 2021. "Capital structure under collusion," Journal of Financial Intermediation, Elsevier, vol. 45(C).
    19. Michael Riordan, 2003. "How Do Capital Markets Influence Product Market Competition?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3), pages 179-191, December.
    20. Spagnolo, Giancarlo, 1998. "Debt as a (Credible) Collusive Device, or: "Everybody Happy but the Consumer"," SSE/EFI Working Paper Series in Economics and Finance 243, Stockholm School of Economics, revised 01 Aug 2004.

    More about this item

    Keywords

    Bertrand competition; Capital structure; Cournot competition; Market share;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:358-371. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.