Strategic Competition, Capital Structure, and Market Share

32 Pages Posted: 6 Mar 2008 Last revised: 10 Jun 2008

See all articles by Abe de Jong

Abe de Jong

Monash University; University of Groningen; European Corporate Governance Institute (ECGI)

Thuy Thu Nguyen

Erasmus University Rotterdam (EUR) - Rotterdam School of Management, Department of Finance; Business Administration Faculty, Foreign Trade University

Mathijs A. van Dijk

Erasmus University Rotterdam (EUR)

Date Written: June 5, 2008

Abstract

This paper examines the interaction between a firm's capital structure and its market share. Theory predicts that this relation depends on the type of strategic competition (i.e., Cournot or Bertrand). We distinguish between Cournot and Bertrand industries in a sample of U.S. manufacturing firms based on an empirical measure of strategic substitutes and strategic complements. We study the joint determination of leverage and market share and test the theoretical predictions of Dasgupta and Titman (1998) and Faure-Grimaud (2000). We show that in Cournot (Bertrand) competition, leverage negatively (positively) affects market share. Conversely, market share has a negative impact on leverage for Cournot firms, but no impact for Bertrand firms. Our findings emphasize the role of strategic competition in the interaction between capital structure and market share.

Keywords: Strategic debt, capital structure, market share, Cournot competition, Bertrand competition

JEL Classification: G32, L10, L60

Suggested Citation

de Jong, Abe and Nguyen, Thuy Thu and van Dijk, Mathijs A., Strategic Competition, Capital Structure, and Market Share (June 5, 2008). EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1101359 or http://dx.doi.org/10.2139/ssrn.1101359

Abe De Jong

Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

University of Groningen ( email )

Postbus 72
9700 AB Groningen
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Thuy Thu Nguyen (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management, Department of Finance ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands
0031 1048 2792 (Phone)

Business Administration Faculty, Foreign Trade University ( email )

91 Chua Lang
Dong Da District
Hanoi
Vietnam

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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