47 Pages Posted: 22 Aug 2016 Last revised: 11 May 2017
Date Written: February 1, 2017
Manufacturing firms manage their capital structure policy differently in response to domestic and international competition. Competition captures the uncertainty arising from the firm's competitive environment. A rise in uncertainty raises the demand for crash proof liquidity. An asset seizes to be liquid when it suffers a capital loss. This creates a wedge between the current and the collateral value of assets. For firms operating in a competitive domestic environment the wedge between the current and the collateral value of assets is low due to more easily redeployable assets. Thus, firms in these industries have higher leverage. Firms operating in import intensive industries have assets that are less easily redeployable. Thus the wedge between the current and the collateral value of assets is large making assets less desirable as collateral. Therefore, firms operating in these industries have lower leverage.
Keywords: Product market competition, financing policies, capital structure, asset redeployability
JEL Classification: G15, G32, G38
Suggested Citation: Suggested Citation
Nyatee, Anisha, Competition and Capital Structure (February 1, 2017). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2826142 or http://dx.doi.org/10.2139/ssrn.2826142