Imperfect Competition in Financial Markets and Capital Structure

Sergei Guriev and Dmitriy Kvasov
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Dmitriy Kvasov: University of Adelaide

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

Keywords: Capital structure; Pecking order theory of finance; Oligopoly in financial markets; Second degree price discrimination (search for similar items in EconPapers)
Date: 2009-10
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Citations: View citations in EconPapers (3)

Published in Journal of Economic Behavior and Organization, 2009, 72 (1), pp.131 - 146. ⟨10.1016/j.jebo.2009.05.004⟩

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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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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03415678

DOI: 10.1016/j.jebo.2009.05.004

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