Optimal Capital Structure with Imperfect Competition

Anatomy of financial distress: An examination of junk-bond issuers

Egor Matveyev and Alexei Zhdanov

The Review of Corporate Finance Studies, 2022, vol. 11, issue 2, 314-363

Abstract: We develop a model of optimal capital structure in imperfectly competitive markets by focusing on a duopoly. The model endogenizes both the financing and investment decisions of firms. We show that in equilibrium the industry leader uses debt conservatively, while the follower uses debt more aggressively and, as the result, defaults first. The model generates novel predictions about the leverage choices of the leader and the follower, their default likelihood, and the degree of leverage dispersion between competing firms. These predictions are strongly supported by the data. (JEL G13, G34, L13)

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:oup:rcorpf:v:11:y:2022:i:2:p:314-363.

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