Capital Structure, Product Market Competition and Default Risk

Magali Pedro Costa () and Cesaltina Pires
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Magali Pedro Costa: CEFAGE-UÉ and ESTG, Instituto Politécnico de Leiria, Portugal

CEFAGE-UE Working Papers from University of Evora, CEFAGE-UE (Portugal)

Abstract: The aim of this paper is to analyze the equilibrium default risk in a two-stage duopoly model, where firms decide their financial structure in the first stage of the game and take their output market decisions in the second stage of the game. Using the framework of Brander and Lewis (1986) we analyze the impact of changing the parameters of the model (level of demand uncertainty, parameters that affect both firms and firm specific parameters) on the equilibrium default probabilities. This analysis is done both for the Nash equilibrium in the second stage of the game (for fixed debt levels) as well as for the subgame perfect equilibrium. Our results show that both direct and indirect effects (through changes in the equilibrium capital structure and product market decisions) need to be considered and that, in some cases, the total impact of parameters changes on the default risk may be counterintuitive.

Keywords: Capital structure; Product market competition; Default risk. (search for similar items in EconPapers)
JEL-codes: D43 G32 L13 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2014
New Economics Papers: this item is included in nep-com, nep-ind and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:cfe:wpcefa:2014_14

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