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Debt, Investment, and Product Market Competition

43 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: December 1996

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. The theoretical papers in this literature addresses all three of these strategic decisions, however, they only examine at most two of these decisions simultaneously and hence have been unable to fully explain the empirical finding. This paper develops a model which examines all three decisions and shows that debt and investment can be strategic substitutes in a model where firms rationally take on debt. Furthermore it is demonstrated that when firms compete in 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 (December 1996). NYU Working Paper No. FIN-96-021. Available at SSRN: https://ssrn.com/abstract=1297128

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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