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The strategic use of debt reconsidered

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  • Haan, Marco A.
  • Toolsema, Linda A.

Abstract

We consider a two-stage differentiated goods duopoly model with demand uncertainty linking firms' capital structure choice to their output market decisions. Using a numerical analysis, we study how the equilibrium of the model is affected by demand volatility and the substitutability between products. In doing so, we correct a mistake in earlier papers in this literature. Most importantly, we find that the equilibrium debt level decreases as demand becomes more volatile.

Suggested Citation

  • Haan, Marco A. & Toolsema, Linda A., 2008. "The strategic use of debt reconsidered," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 616-624, March.
  • Handle: RePEc:eee:indorg:v:26:y:2008:i:2:p:616-624
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    References listed on IDEAS

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    1. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-653, June.
    2. repec:dgr:rugsom:06f06 is not listed on IDEAS
    3. Kovenock, Dan & Phillips, Gordon M, 1997. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 767-803.
    4. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
    5. Marco A. Haan & Linda A. Toolsema, 2011. "License Auctions When Winning Bids Are Financed Through Debt," Journal of Industrial Economics, Wiley Blackwell, vol. 59(2), pages 254-281, June.
    6. Jensen, Richard & Showalter, Dean, 2004. "Strategic debt and patent races," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 887-915, September.
    7. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-435, June.
    8. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    9. Wanzenried, Gabrielle, 2003. "Capital structure decisions and output market competition under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 171-200, February.
    10. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
    11. Opler, Tim C & Titman, Sheridan, 1994. " Financial Distress and Corporate Performance," Journal of Finance, American Finance Association, vol. 49(3), pages 1015-1040, July.
    12. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
    13. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
    14. John S. Hughes & Jennifer L. Kao & Arijit Mukherji, 1998. "Oligopoly, Financial Structure, and Resolution of Uncertainty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 67-88, March.
    15. Michel Poitevin, 1989. "Collusion and the Banking Structure of a Duopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 263-277, May.
    16. Oechssler, Jorg & Schuhmacher, Frank, 2004. "The limited liability effect in experimental duopoly markets," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 163-184, February.
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    Cited by:

    1. Magali Pedro Costa & Cesaltina Pires, 2014. "Capital Structure, Product Market Competition and Default Risk," CEFAGE-UE Working Papers 2014_14, University of Evora, CEFAGE-UE (Portugal).
    2. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
    3. de Jong, A. & Nguyen, T.T. & van Dijk, M.A., 2007. "Strategic Debt: Evidence from Bertrand and Cournot Competition," ERIM Report Series Research in Management ERS-2007-057-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.

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