nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒11‒17
one paper chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Strategic Debt: Evidence from Bertrand and Cournot Competition By Jong, A. de; Nguyen, T.T.; Dijk, M.A. van

  1. 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

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