Capital Structure and Interaction Among Firms in Output Markets - Theory and Evidence

51 Pages Posted: 30 Apr 2003 Last revised: 14 Mar 2013

Date Written: 2004

Abstract

I develop a simple model that examines the relations between the extent of competitive interaction among firms in output markets, their capital structures, and the aggressiveness of their operating strategies. A firm's optimal leverage is related to the degree to which its operating strategy affects its rivals' value functions and resulting optimal output market choices. This relation is positive, regardless of whether the competition in output markets is in strategic substitutes or in strategic complements. I test the model's prediction using two proxies for the extent of competitive interaction among firms. The empirical evidence, obtained using 54 years of Compustat data, provides a strong support for the model.

Keywords: Capital Structure, Output Markets, Competitive Interaction

JEL Classification: G32, D43

Suggested Citation

Lyandres, Evgeny, Capital Structure and Interaction Among Firms in Output Markets - Theory and Evidence (2004). Journal of Business, Vol. 79, pp. 2381-2421, 2004. Available at SSRN: https://ssrn.com/abstract=400620 or http://dx.doi.org/10.2139/ssrn.400620

Evgeny Lyandres (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-3582279 (Phone)

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