Collusion and Financial Leverage: An Analysis of the Integrated Mill Steel Industry

Richard A. Lord and W. Ken Farr

Financial Management, 2003, vol. 32, issue 1

Abstract: We show that firms can design their capital structure to provide a publicly observable indication of compliance with a collusive agreement. We develop two empirically testable hypotheses based on this argument and test these propositions on data for seven integrated mill steel firms. Our study period covers years when prices were overtly coordinated under the basing point pricing system and after the demise of the system. Empirical tests confirm the hypotheses that leverage is positively related to both price elasticity of demand and the level of convertibles outstanding during the years after the collapse of the basing point pricing system.

Date: 2003
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