Strategic Debt: Evidence from Bertrand and Cournot Competition

Abe de Jong, Thuy Thu Nguyen and Mathijs van Dijk ()

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

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: Bertrand competition; Cournot competition; Strategic debt; demand and cost uncertainty; leverage (search for similar items in EconPapers)
JEL-codes: D41 G3 M (search for similar items in EconPapers)
Date: 2007-09-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Strategic Debt: Evidence from Bertrand and Cournot Competition (2008)
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