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Capital Structure, Product Market Competition and Default Risk

Author

Listed:
  • Magali Pedro Costa

    (CEFAGE-UE and ESTG, Instituto Politécnico de Leiria, Portugal)

  • Cesaltina Pires

    (CEFAGE-UE and Departamento de Gestão, Universidade de Évora, Portugal)

Abstract

The aim of this paper is to analyze the equilibrium default risk in a two-stage duopoly model, where firms decide their financial structure in the first stage of the game and take their output market decisions in the second stage of the game. Using the framework of Brander and Lewis (1986) we analyze the impact of changing the parameters of the model (level of demand uncertainty, parameters that affect both firms and firm specific parameters) on the equilibrium default probabilities. This analysis is done both for the Nash equilibrium in the second stage of the game (for fixed debt levels) as well as for the subgame perfect equilibrium. Our results show that both direct and indirect effects (through changes in the equilibrium capital structure and product market decisions) need to be considered and that, in some cases, the total impact of parameters changes on the default risk may be counterintuitive.

Suggested Citation

  • 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).
    • Handle: RePEc:cfe:wpcefa:2014_14
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Capital structure; Product market competition; Default risk.;
    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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