The strategic use of debt reconsidered
AbstractWanzenried (2003, International Journal of Industrial Organization 21(2), 171-200) considers a two-stage differentiated goods duopoly model with demand uncertainty linking firms? capital structure choice to their output market decisions. Unfortunately, her analysis is flawed. We correct for this, and solve the model umerically to find some results that are qualitatively different from hers. First, in equilibrium, the use of debt always yields lower firm profits, i.e. even in the case of complements. Second, the equilibrium debt level decreases as demand becomes more volatile. We also discuss some problems with the debt contract commonly used in the strategic debt literature.
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Bibliographic InfoPaper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 03E37.
Date of creation: 2003
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