Strategic Debt: Evidence from Bertrand and Cournot Competition

31 Pages Posted: 10 Sep 2007

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University

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 School of Management; Erasmus Research Institute of Management (ERIM)

Multiple version iconThere are 2 versions of this paper

Date Written: June 25, 2007

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

JEL Classification: G32, L10, L60

Suggested Citation

de Jong, Abe and Nguyen, Thuy Thu and Van Dijk, Mathijs A., Strategic Debt: Evidence from Bertrand and Cournot Competition (June 25, 2007). Available at SSRN: https://ssrn.com/abstract=1012782 or http://dx.doi.org/10.2139/ssrn.1012782

Abe De Jong

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

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 School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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