Capital Structure and Product Markets Interactions: Evidence from Business Cycles

Posted: 11 Apr 2002

See all articles by Murillo Campello

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Abstract

This paper provides firm- and industry-level evidence on the effects of capital structure on product market outcomes for a large cross-section of industries. The analysis uses shocks to aggregate demand as surrogates for exogenous changes in the product market environment, dealing with concerns about the endogenous nature of the relation between financial structure and competitive performance. I find that debt financing has a negative impact on firm (relative-to-industry) sales growth in industries where rivals are relatively unlevered during recessions, but not during booms. In contrast, no such effects are observed for firms competing in high-debt industries. At the industry level, I find that markups are more countercyclical when industry debt is high. The cyclical dynamics I find for firm sales growth and for industry markups are consistent with Chevalier and Scharfstein's (1996) prediction that firms that rely more heavily on external financing are more prone to boost short-term profits at the expense of future sales in response to negative shocks to demand, and that the competitive outcomes resulting from such actions depend on the financial structures of their industry rivals.

JEL Classification: G32, L16

Suggested Citation

Campello, Murillo, Capital Structure and Product Markets Interactions: Evidence from Business Cycles. Journal of Financial Economics, Vol. 68, pp. 353-378, 2003. Available at SSRN: https://ssrn.com/abstract=303859

Murillo Campello (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Register to save articles to
your library

Register

Paper statistics

Abstract Views
955
PlumX Metrics