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Imperfect Competition in Financial Markets and Capital Structure

Author

Listed:
  • Sergei Guriev
  • Dmitriy Kvasov

    (University of Adelaide)

Abstract

We consider a model of corporate finance with imperfectly competitive financial intermediaries. Firms can finance projects either via debt or via equity. Because of asymmetric information about firms' growth opportunities, equity financing involves a dilution cost. Nevertheless, equity emerges in equilibrium whenever financial intermediaries have sufficient market power. In the latter case, best firms issue debt while the less profitable firms are equity-financed. We also show that strategic interaction between oligopolistic intermediaries results in multiple equilibria. If one intermediary chooses to buy more debt, the price of debt decreases, so the best equity-issuing firms switch from equity to debt financing. This in turn decreases average quality of equity-financed pool, so other intermediaries also shift towards more debt.

Suggested Citation

  • Sergei Guriev & Dmitriy Kvasov, 2009. "Imperfect Competition in Financial Markets and Capital Structure," Post-Print hal-03415678, HAL.
    • Handle: RePEc:hal:journl:hal-03415678
    DOI: 10.1016/j.jebo.2009.05.004
    as

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    References listed on IDEAS

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    Cited by:

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    3. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working papers 122846, Factor Markets, Centre for European Policy Studies.

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    More about this item

    Keywords

    Capital structure; Pecking order theory of finance; Oligopoly in financial markets; Second degree price discrimination;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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