Industry Dynamics and Capital Structure (Non)Commitment

50 Pages Posted: 19 Jun 2020 Last revised: 16 Nov 2020

See all articles by Shiqi Chen

Shiqi Chen

University of Cambridge - Judge Business School

Hui Xu

Lancaster University - Management School

Date Written: May 11, 2020


We develop a competitive equilibrium model of leverage and industry dynamics absent of equity holders’ commitment to future debt levels. Shareholders determine the debt adjustment together with production, entry and exit decisions in response to firm-specific technology shocks. Non-commitment gives rise to debt issuance, which increases the cost of debt financing. Consequently, the entry barrier is raised, hindering entries into the market. Meanwhile, the resultant higher output price alleviates debt-equity conflicts for firms already in the industry. More importantly, non-commitment increases the mass of high-leverage firms, reshaping the distribution of the firm universe and escalating industry turnover and leverage. The results are aligned with empirical distribution features, suggesting debt-equity conflicts at the firm level can have a profound influence on industry dynamics.

Keywords: capital structure, non-commitment, industry dynamics, product market competition

JEL Classification: E21, E32, G12, G32

Suggested Citation

Chen, Shiqi and Xu, Hui, Industry Dynamics and Capital Structure (Non)Commitment (May 11, 2020). Available at SSRN: or

Shiqi Chen

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Hui Xu (Contact Author)

Lancaster University - Management School ( email )

Lancaster, LA1 4YX
United Kingdom

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