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Optimal Capital Structure with Imperfect Competition
[Anatomy of financial distress: An examination of junk-bond issuers]

Author

Listed:
  • Egor Matveyev
  • Alexei Zhdanov

Abstract

We develop a model of optimal capital structure in imperfectly competitive markets by focusing on a duopoly. The model endogenizes both the financing and investment decisions of firms. We show that in equilibrium the industry leader uses debt conservatively, while the follower uses debt more aggressively and, as the result, defaults first. The model generates novel predictions about the leverage choices of the leader and the follower, their default likelihood, and the degree of leverage dispersion between competing firms. These predictions are strongly supported by the data. (JEL G13, G34, L13)

Suggested Citation

  • Egor Matveyev & Alexei Zhdanov, 2022. "Optimal Capital Structure with Imperfect Competition [Anatomy of financial distress: An examination of junk-bond issuers]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(2), pages 314-363.
  • Handle: RePEc:oup:rcorpf:v:11:y:2022:i:2:p:314-363.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfac001
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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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