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Competitive Equilibrium With Debt

40 Pages Posted: 6 Oct 2005  

Alexei Zhdanov

Pennsylvania State University

Date Written: February 2007

Abstract

This paper studies the interaction among financing, entry, and exit decisions of firms in a competitve industry subject to aggregate uncertainty. In contrast to Fries, Miller and Perraudin (1997), I do not assume that a firm in default leaves the industry immediately. The implications on the optimal leverage ratios and equilibrium credit spreads are discussed. It is shown that by incorporating the effect of competition, the model results in significantly higher credit spreads than those predicted by traditional single-firm models. Dynamic capital structure strategies in a competitive industry are also examined. The model renders a number of empirical predictions regarding leverage ratios and credit spreads of firms in a competitive industry.

Keywords: Real Options, Capital Structure

JEL Classification: G13, G32

Suggested Citation

Zhdanov, Alexei, Competitive Equilibrium With Debt (February 2007). Available at SSRN: https://ssrn.com/abstract=809508 or http://dx.doi.org/10.2139/ssrn.809508

Alexei Zhdanov (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

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