Imperfect competition in financial markets and capital structure

Sergei Guriev and Dmitriy Kvasov

Journal of Economic Behavior & Organization, 2009, vol. 72, issue 1, 131-146

Abstract: We consider a model of corporate finance with imperfectly competitive financial intermediaries. Firms can finance projects either via debt or via equity. Because of asymmetric information about firms' growth opportunities, equity financing involves a dilution cost. Nevertheless, equity emerges in equilibrium whenever financial intermediaries have sufficient market power. In the latter case, best firms issue debt while the less profitable firms are equity-financed. We also show that strategic interaction between oligopolistic intermediaries results in multiple equilibria. If one intermediary chooses to buy more debt, the price of debt decreases, so the best equity-issuing firms switch from equity to debt financing. This in turn decreases average quality of equity-financed pool, so other intermediaries also shift towards more debt.

Keywords: Capital; structure; Pecking; order; theory; of; finance; Oligopoly; in; financial; markets; Second; degree; price; discrimination (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Imperfect competition in financial markets and capital structure (2009)
Working Paper: Imperfect competition in financial markets and capital structure (2009)
Working Paper: Imperfect Competition in Financial Markets and Capital Structure (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:72:y:2009:i:1:p:131-146

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