Imperfect competition in financial markets and capital structure

Sergei Guriev and Dmitriy Kvasov

No w0151, Working Papers from New Economic School (NES)

Abstract: We consider a model of corporate nance with imperfectly competitive fi nancial intermediaries. Firms can fi nance projects either via debt or via equity. Because of asymmetric information about fi rm's growth opportunities, equity fi nancing involves a dilution cost. Nevertheless, equity emerges in equilibrium whenever fi nancial intermediaries have sufficient market power. In the latter case, best fi rms issue debt while the less pro table firms are equity-fi nanced. 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 fi rms switch from equity to debt nancing. This in turn decreases average quality of equity-fi nanced pool, so other intermediaries also shift towards more debt.

Keywords: capital structure; pecking order theory of fi nance; oligopoly in financial markets; second degree price discrimination (search for similar items in EconPapers)
JEL-codes: D43 G32 L13 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://www.nes.ru/files/Preprints-resh/WP151.pdf (application/pdf)

Related works:
Journal Article: 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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