The Impact of Capital Structure on Advertising Competition: An Empirical Study

Gustavo Grullon and George Kanatas
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Gustavo Grullon: Rice University
George Kanatas: Rice University

The Journal of Business, 2006, vol. 79, issue 6, 3101-3124

Abstract: This article examines the interaction between capital structure and advertising competition. Using a sample of firms that raise significant amounts of capital, we find that firms whose financial leverage has decreased as a result of their new funding increase their advertising significantly more than firms whose leverage has increased. We also find that these firms' industry rivals respond less aggressively with their own advertising when they have more debt in their capital structure. Overall, our results support the view that financial leverage has a "dampening" effect on the intensity with which a firm chooses to compete in the product market.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:79:y:2006:i:6:p:3101-3124

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