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Imperfect competition in financial markets and capital structure

  • Sergei Guriev

    ()

    (New Economic School, Moscow, and CEPR)

  • Dmitriy Kvasov

    ()

    (University of Auckland)

We consider a model of corporate nance with imperfectly competitive fi nancial intermediaries. Firms can fi nance projects either via debt or via equity. Because of asymmetric information about fi rm's ’growth opportunities, equity fi nancing involves a dilution cost. Nevertheless, equity emerges in equilibrium whenever fi nancial intermediaries have sufficient market power. In the latter case, best fi rms issue debt while the less pro table firms are equity-fi nanced. 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 fi rms switch from equity to debt nancing. This in turn decreases average quality of equity-fi nanced pool, so other intermediaries also shift towards more debt.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0151.

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Length: 32 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:cfr:cefirw:w0151
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