Strategic Debt: Evidence from Bertrand and Cournot Competition
AbstractWe investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm's leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms' competitive behavior in the product market in their capital structure decisions.
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Bibliographic InfoPaper provided by Development and Policies Research Center (DEPOCEN), Vietnam in its series Working Papers with number 11.
Length: 31 pages
Date of creation: 2008
Date of revision:
Strategic debt; Cournot competition; Bertrand competition; demand and cost uncertainty; leverage;
Find related papers by 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-04-04 (All new papers)
- NEP-CFN-2008-04-04 (Corporate Finance)
- NEP-COM-2008-04-04 (Industrial Competition)
- NEP-CSE-2008-04-04 (Economics of Strategic Management)
- NEP-MIC-2008-04-04 (Microeconomics)
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- Milliou, Chrysovalantou & Petrakis, Emmanuel, 2011.
"Timing of technology adoption and product market competition,"
International Journal of Industrial Organization,
Elsevier, vol. 29(5), pages 513-523, September.
- Chrysovalantou Milliou & Emmanuel Petrakis, 2009. "Timing of Technology Adoption and Product Market Competition," CESifo Working Paper Series 2686, CESifo Group Munich.
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