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Capital Structure and Interaction among Firms in Output Markets: Theory and Evidence

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  • Evgeny Lyandres

    (Rice University)

Abstract

I develop a simple model that examines the relations between the extent of competitive interaction among firms in output markets, their capital structures, and the aggressiveness of their operating strategies. A firm's optimal leverage is related to the degree to which its operating strategy affects its rivals' value functions and resulting optimal output market choices. This relation is positive, regardless of whether the competition in output markets is in strategic substitutes or in strategic complements. I test the model's prediction using two proxies for the extent of competitive interaction among firms. The empirical evidence provides support for the model.

Suggested Citation

  • Evgeny Lyandres, 2006. "Capital Structure and Interaction among Firms in Output Markets: Theory and Evidence," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2381-2422, September.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:5:p:2381-2422
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    File URL: http://dx.doi.org/10.1086/505239
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    Citations

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    Cited by:

    1. Sánchez-Valadez, Manuel, 2012. "Decisiones financieras, competencia en el mercado y desempeño de las empresas: Evidencia empírica para Iberoamérica/Financial Decisions, Market Competition and Firm Performance: Empirical Evidence for," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 30, pages 359(36)-359, Abril.
    2. Valta, Philip, 2012. "Competition and the cost of debt," Journal of Financial Economics, Elsevier, vol. 105(3), pages 661-682.
    3. Park, Kwangho & Yang, Insun & Yang, Taeyong, 2017. "The peer-firm effect on firm’s investment decisions," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 178-199.
    4. repec:kap:rqfnac:v:50:y:2018:i:1:d:10.1007_s11156-017-0629-x is not listed on IDEAS
    5. Lyandres, Evgeny, 2010. "Target leverage and the costs of issuing seasoned equity," Finance Research Letters, Elsevier, vol. 7(1), pages 39-52, March.
    6. Patrick Legros & Andrew F. Newman, 2014. "Contracts, Ownership, and Industrial Organization: Past and Future," Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 82-117.
    7. repec:eee:jbfina:v:87:y:2018:i:c:p:248-263 is not listed on IDEAS
    8. Kale, Jayant R. & Shahrur, Husayn, 2007. "Corporate capital structure and the characteristics of suppliers and customers," Journal of Financial Economics, Elsevier, vol. 83(2), pages 321-365, February.
    9. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216.
    10. Chod, Jiri & Lyandres, Evgeny, 2011. "Strategic IPOs and product market competition," Journal of Financial Economics, Elsevier, vol. 100(1), pages 45-67, April.
    11. 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.
    12. Mitani, Hidetaka, 2014. "Capital structure and competitive position in product market," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 358-371.
    13. Larkin, Yelena, 2013. "Brand perception, cash flow stability, and financial policy," Journal of Financial Economics, Elsevier, vol. 110(1), pages 232-253.
    14. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
    15. Sarkar, Sudipto, 2014. "Product–market flexibility and capital structure," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 111-122.

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