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Competitive Equilibrium with Debt

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  • Zhdanov, Alexei

Abstract

This paper studies the interaction among financing, entry, and exit decisions of firms in a competitive industry subject to aggregate uncertainty. In contrast to Fries, Miller, and Perraudin (1997), I do not assume that a firm in default leaves the industry immediately. The implications on the optimal leverage ratios and equilibrium credit spreads are discussed. By incorporating the effect of competition, I show that the model results in significantly higher credit spreads than those predicted by traditional single firm models. Dynamic capital structure strategies in a competitive industry are also examined. The model renders a number of empirical predictions regarding leverage ratios and credit spreads of firms in a competitive industry.

Suggested Citation

  • Zhdanov, Alexei, 2007. "Competitive Equilibrium with Debt," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(03), pages 709-734, September.
  • Handle: RePEc:cup:jfinqa:v:42:y:2007:i:03:p:709-734_00
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    Cited by:

    1. Tetsuya Yamada, 2010. "Accelerated Investment and Credit Risk under a Low Interest Rate Environment: A Real Options Approach," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 28, pages 181-214, November.
    2. Valta, Philip, 2012. "Competition and the cost of debt," Journal of Financial Economics, Elsevier, vol. 105(3), pages 661-682.
    3. Morellec, Erwan & Zhdanov, Alexei, 2008. "Financing and takeovers," Journal of Financial Economics, Elsevier, vol. 87(3), pages 556-581, March.
    4. Lyandres, Evgeny & Zhdanov, Alexei, 2010. "Accelerated investment effect of risky debt," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2587-2599, November.
    5. Mohammad M Rahaman, 2016. "Chinese import competition and the provisions for external debt financing in the US," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 47(8), pages 898-928, October.
    6. Tetsuya Yamada, 2010. "Accelerated Investment and Credit Risk under a Low Interest Rate Environment: A Real Options Approach," IMES Discussion Paper Series 10-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
    7. Chod, Jiri & Lyandres, Evgeny, 2011. "Strategic IPOs and product market competition," Journal of Financial Economics, Elsevier, vol. 100(1), pages 45-67, April.
    8. Nishihara, Michi, 2014. "Preemptive investment game with alternative projects," Economic Modelling, Elsevier, vol. 43(C), pages 124-135.
    9. Teodora Paligorova & Jun Yang, 2014. "Corporate Governance, Product Market Competition and Debt Financing," Staff Working Papers 14-5, Bank of Canada.

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