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The Impact of Capital Structure on Advertising Competition: An Empirical Study

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Author Info

  • Gustavo Grullon

    (Rice University)

  • George Kanatas

    (Rice University)

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    Abstract

    This article examines the interaction between capital structure and advertising competition. Using a sample of firms that raise significant amounts of capital, we find that firms whose financial leverage has decreased as a result of their new funding increase their advertising significantly more than firms whose leverage has increased. We also find that these firms' industry rivals respond less aggressively with their own advertising when they have more debt in their capital structure. Overall, our results support the view that financial leverage has a "dampening" effect on the intensity with which a firm chooses to compete in the product market.

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    File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB790613
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 6 (November)
    Pages: 3101-3124

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:6:p:3101-3124

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Larkin, Yelena, 2013. "Brand perception, cash flow stability, and financial policy," Journal of Financial Economics, Elsevier, vol. 110(1), pages 232-253.
    2. Lin, Chen & Lin, Ping & Zou, Hong, 2012. "Does property rights protection affect corporate risk management strategy? Intra- and cross-country evidence," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 311-330.
    3. Greg Filbeck & Xin Zhao & Daniel Tompkins & Peggy Chong, 2009. "Share price reactions to advertising announcements and broadcast of media events," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(4), pages 253-264.
    4. Firth, Michael & Lin, Chen & Wong, Sonia M.L., 2008. "Leverage and investment under a state-owned bank lending environment: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 642-653, December.
    5. Masulis, Ronald W. & Nahata, Rajarishi, 2009. "Financial contracting with strategic investors: Evidence from corporate venture capital backed IPOs," Journal of Financial Intermediation, Elsevier, vol. 18(4), pages 599-631, October.
    6. Fee, C. Edward & Hadlock, Charles J. & Pierce, Joshua R., 2012. "What happens in acquisitions?," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 584-597.

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