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Imperfect competition in financial markets and capital structure

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  • Guriev, Sergei
  • Kvasov, Dmitriy

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

  • Guriev, Sergei & Kvasov, Dmitriy, 2009. "Imperfect competition in financial markets and capital structure," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 131-146, October.
  • Handle: RePEc:eee:jeborg:v:72:y:2009:i:1:p:131-146
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    Cited by:

    1. Yong-Bo Wang & Jin-Ray Lu, 2016. "A Supply-Lock Competitive Market for Investable Products," Asian Development Policy Review, Asian Economic and Social Society, vol. 4(4), pages 127-133, December.
    2. 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.
    3. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers 123, Centre for European Policy Studies.

    More about this item

    Keywords

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

    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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