Strategic Debt: Evidence from Bertrand and Cournot Competition

Abe de Jong (), Thuy Nguyen () and Mathijs van Dijk ()
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Abe de Jong: RSM Erasmus University

No 11, Working Papers from Development and Policies Research Center (DEPOCEN), Vietnam

Abstract: We investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm's leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms' competitive behavior in the product market in their capital structure decisions.

Keywords: Strategic debt; Cournot competition; Bertrand competition; demand and cost uncertainty; leverage (search for similar items in EconPapers)
JEL-codes: G32 L10 L60 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2008
New Economics Papers: this item is included in nep-cfn, nep-com, nep-cse and nep-mic
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Citations: View citations in EconPapers (4)

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Working Paper: Strategic Debt: Evidence from Bertrand and Cournot Competition (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:dpc:wpaper:1108

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