Strategic Competition, Capital Structure, and Market Share
32 Pages Posted: 6 Mar 2008 Last revised: 10 Jun 2008
Date Written: June 5, 2008
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: Suggested Citation