Strategic Debt: Evidence from Bertrand and Cournot Competition

35 Pages Posted: 18 Sep 2007

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University; Monash University; European Corporate Governance Institute (ECGI)

T.T. Nguyen

affiliation not provided to SSRN

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: September 11, 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: leverage, Bertrand competition, Cournot competition, Strategic debt, demand and cost uncertainty

Suggested Citation

de Jong, Abe and Nguyen, T.T. and Van Dijk, Mathijs A., Strategic Debt: Evidence from Bertrand and Cournot Competition (September 11, 2007). ERIM Report Series Reference No. ERS-2007-057-F&A. Available at SSRN: https://ssrn.com/abstract=1015163

Abe De Jong (Contact Author)

Rotterdam School of Management, Erasmus University ( email )

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European Corporate Governance Institute (ECGI) ( email )

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T.T. Nguyen

affiliation not provided to SSRN

No Address Available

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)

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3000 DR Rotterdam
Netherlands

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