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Debt, Investment, and Product Market Competition

45 Pages Posted: 7 Nov 2008  

Matthew J. Clayton

University of Virginia - McIntire School of Commerce

Multiple version iconThere are 3 versions of this paper

Date Written: July 1997

Abstract

Recent empirical literature on the interaction between capital structure, investment, and product market decisions suggests that debt leads to lower investment expenditures and weaker product market competition. Theoretical literature in this area has been unable to fully explain this finding (perhaps because all theoretical papers look only at two of the above decisions). This paper develops a model which examines all three decisions and shows that debt and investment can be substitutes in a model where firms rationally take on debt. Furthermore, it is demonstrated that when firms compete with prices in the product market, an increase in debt leads to lower investment and higher prices.

Suggested Citation

Clayton, Matthew J., Debt, Investment, and Product Market Competition (July 1997). NYU Working Paper No. FIN-98-021. Available at SSRN: https://ssrn.com/abstract=1296418

Matthew J. Clayton (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

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