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Strategic Debt: Evidence from Bertrand and Cournot Competition

  • Abe de Jong

    ()

    (RSM Erasmus University)

  • Thuy Thu Nguyen

    ()

    (RSM Erasmus University)

  • Mathijs A. van Dijk

    ()

    (RSM Erasmus University)

We investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm's leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms' competitive behavior in the product market in their capital structure decisions.

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Paper provided by Development and Policies Research Center (DEPOCEN), Vietnam in its series Working Papers with number 11.

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Length: 31 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:dpc:wpaper:1108
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  1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  2. Sudipto Dasgupta & Sheridan Titman, 1996. "Pricing Strategy and Financial Policy," NBER Working Papers 5498, National Bureau of Economic Research, Inc.
  3. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
  4. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
  5. Faure-Grimaud, Antoine, 2000. "Product market competition and optimal debt contracts: The limited liability effect revisited," European Economic Review, Elsevier, vol. 44(10), pages 1823-1840, December.
  6. Kovenock, D. & Phillips, G.M., 1995. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," UFAE and IAE Working Papers 313.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  7. 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.
  8. Campello, Murillo, 2006. "Debt financing: Does it boost or hurt firm performance in product markets?," Journal of Financial Economics, Elsevier, vol. 82(1), pages 135-172, October.
  9. Clarke, Richard N, 1989. "SICs as Delineators of Economic Markets," The Journal of Business, University of Chicago Press, vol. 62(1), pages 17-31, January.
  10. 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.
  11. 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 415-35, June.
  12. 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.
  13. repec:dgr:rugsom:03e37 is not listed on IDEAS
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