Debt, Investment, and Product Market Competition

Matthew J. Clayton

New York University, Leonard N. Stern School Finance Department Working Paper Seires from New York University, Leonard N. Stern School of Business-

Abstract: Recent empirical literature on the interaction between capital structure, investment, and product market decisions suggests that debt leads to lower investment expenditures and weaker product market competition. Theoretical literature in this area has been unable to fully explain this finding (perhaps because all theoretical papers look only at two of the above decisions). This paper develops a model which examines all three decisions and shows that debt and investment can be substitutes in a model where firms rationally take on debt. Furthermore, it is demonstrated that when firms compete with prices in the product market, an increase in debt leads to lower investment and higher prices.

Date: 1999-01
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Persistent link: http://EconPapers.repec.org/RePEc:fth:nystfi:99-056

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