Debt Financing: Does it Boost or Hurt Firm Performance in Product Markets?

42 Pages Posted: 21 Apr 2005

See all articles by Murillo Campello

Murillo Campello

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


Research on capital structure-product market interactions has traditionally sought to establish whether debt financing either hurts or boosts firm performance. This paper proposes that both of these competitive outcomes are likely to emerge in an industry setting: debt can hurt and boost a firm's product market performance. To motivate this case, I analyze a simple model implying a non-monotonic relation between a firm's use of external (debt-like) financing and its competitive conduct. I then empirically examine the within-industry relation between corporate debt and sales performance using firm-level data from a panel of 115 industries over 30 years. The testing strategy I implement allows for the marginal effect of debt policies on product market outcomes to vary according to the level of firm/rival indebtedness. Crucially, it addresses concerns with the endogeneity of financing decisions in a novel fashion: I use creditors' valuation of firms' assets in liquidation to identify financial leverage in an empirical model of product market performance. My evidence suggests that moderate (relative-to-industry) firm debt taking is, on the margin, associated with sales gains that obtain at the expense of industry rivals. After some point, however, higher relative indebtedness leads to significant sales underperformance. I also investigate whether financing-performance linkages vary with industry concentration and with firm leadership (market share size). I find that leader (follower) firms in concentrated industries underperform (outperform) their rivals when those firms' leverage ratios exceed the industry norm. In contrast, less leveraged leaders in those same industries observe positive sales-debt sensitivities. Firm debt and leadership positions are less relevant for competitive outcomes in less concentrated markets.

Keywords: Capital structure, product market competition, industry concentration, endogeneity, GMM

JEL Classification: G31, G32, L11

Suggested Citation

Campello, Murillo, Debt Financing: Does it Boost or Hurt Firm Performance in Product Markets?. Journal of Financial Economics, Forthcoming. Available at SSRN:

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


National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics