Capital Structure in Repeated Oligopolies

Vojislav Maksimovic

RAND Journal of Economics, 1988, vol. 19, issue 3, 389-407

Abstract: This article analyzes the effect of a firm's capital structure on its product market strategy in the context of a model of repeated oligopoly. I show that there exists an upper bound on the firm's debt level in the absence of bankruptcy costs. This bound depends on the number of firms in the industry, the discount rate, the elasticity of demand, and other related factors that affect product market equilibrium in oligopolies. I also show that warrants may decrease equilibrium output in oligopolies and that convertible debt and warrants may be used to raise the upper bound on the debt level in specific cases. I show that the effect of capacity constraints on optimal capital structure is nonmonotonic.

Date: 1988
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