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Capital Structure and Imperfect Competition in Product Markets (Revision of 20-85, 24-84)

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  • Franklin Allen

Abstract

A linear duopoly model is used to consider investment and financing decisions. Bankruptcy is assumed to cause a delay in investment which is not costly in itself. However, the imperfect competition in the product market means this delay puts the bankrupt firm at a strategic disadvantage which forces it to either partially or completely liquidate. Since this is costly, firms use only a limited amount of debt despite the corporate tax advantage it enjoys. Equilibrium can be symmetric or asymmetric. In the latter case similar firms have different capital structures.

Suggested Citation

  • Franklin Allen, "undated". "Capital Structure and Imperfect Competition in Product Markets (Revision of 20-85, 24-84)," Rodney L. White Center for Financial Research Working Papers 11-87, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:11-87
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    Cited by:

    1. Matthew J. Clayton & S. Abraham Ravid, 1999. "The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-055, New York University, Leonard N. Stern School of Business-.

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