Imperfect Competition in Financial Markets and Capital Structure

35 Pages Posted: 14 Oct 2004

See all articles by Sergei Guriev

Sergei Guriev

Institut d'Etudes Politiques de Paris (Sciences Po); Centre for Economic Policy Research (CEPR)

Dmitriy Kvasov

Waseda University

Date Written: August 2007

Abstract

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

Keywords: Capital structure, pecking order theory of finance, oligopoly in financial markets, second degree price discrimination

JEL Classification: D43, G32, L13

Suggested Citation

Guriev, Sergei and Kvasov, Dmitriy, Imperfect Competition in Financial Markets and Capital Structure (August 2007). Available at SSRN: https://ssrn.com/abstract=603721 or http://dx.doi.org/10.2139/ssrn.603721

Sergei Guriev (Contact Author)

Institut d'Etudes Politiques de Paris (Sciences Po) ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

HOME PAGE: http://econ.sciences-po.fr/staff/sergei-guriev

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dmitriy Kvasov

Waseda University ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku, Tokyo 169-8050, Tokyo 169-8050
Japan

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