| By: |
Jong, A. de;
Nguyen, T.T.;
Dijk, M.A. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: |
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. |
| Keywords: |
Strategic debt;Cournot competition;Bertrand competition;demand and cost uncertainty;leverage; |
| Date: |
2007–09–11 |
| URL: |
http://d.repec.org/n?u=RePEc:dgr:eureri:300011783&r=ind |