Author: Lee Greer Publisher: ISBN: Category : Languages : en Pages :
Book Description
The relationship between capital structure and product market competition is examined using a theoretical model and two econometric analyses. In an extension of Glazer (1994), a theoretical model is derived that allows a quantity leader and follower to issue debt and then twice play a sequential product market game, after which each firm must either repay its debt in full or go bankrupt. It is demonstrated that the follower maximizes operating profit irrespective of capital structure but that the levered quantity leader in every period produces more than the Stackelberg profit-maximizing level of output. As such, the industry characterized by a financially levered leader and follower is more competitive than it otherwise would be. Simultaneous equations models consisting of a demand and supply relation are used to analyze monthly data from the domestic steel industry so as to test whether the industry's increased reliance on debt finance over the period 1958 to 1981 affected competition in the market for steel. The supply relation, which follows from the assumption that firms simultaneously select output in order to maximize profit, is augmented with a sales-weighted debt to market value ratio. Two-stage least squares (2SLS), weighted two-stage least squares (W2SLS), and iterative weighted three-stage least squares (IW3SLS) regressions are estimated. Results from all regressions show a statistically significant and positive relationship between the sales-weighted debt-value ratio and the price of steel, which suggests that increased debt finance served to reduce competition in the domestic steel industry over the sample period. In light of the fact that U.S. Steel's market share over the sample period was significantly higher and less volatile than that of any other integrated producer, the second econometric model tests the null hypothesis of quantity leadership, using insights from the theoretical model. Two supply relations, one for the leader and one for the follower, are derived and estimated. To account for the possibly endogenous decision on the part of U.S. Steel to issue debt, a binomial probit is estimated and its fitted probabilities are included as a predetermined variable in the leader's supply relation. Results show that one must reject the null hypothesis of quantity leadership and that U.S. Steel's decision to issue debt had a positive but statistically insignificant effect on the composite steel price.
Author: Gordon M. Phillips Publisher: DIANE Publishing ISBN: 9781568069142 Category : Business & Economics Languages : en Pages : 62
Book Description
Tests whether capital structure influences product market competition between firms that have sharply increased the debt in their capital structure.
Author: Hae Won (Henny) Jung Publisher: ISBN: Category : Languages : en Pages : 54
Book Description
We show how product market competition affects capital structure by developing a tractable model that embeds the tradeoff between the tax benefits and bankruptcy costs of debt in an industry equilibrium setting with heterogeneous, imperfectly competitive firms. Different determinants of competition--fixed production costs and product substitutability--have contrasting implications for the effects of competition on firm leverage. Firms in more competitive industries with greater product substitutability are more leveraged, whereas firms in more competitive industries with lower fixed production costs have lower leverage. We show robust support for our predictions in our empirical analysis of U.S. nonfinancial firms.
Author: Gustavo Grullon Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
We study how a firm's financial structure affects the intensity with which it competes in the product market. Using a sample of firms that raise significant amounts of capital, we study the extent of their non-price competition, as measured by their advertising expenditures, following this event. We find that after controlling for other factors, firms whose financial leverage has decreased as a result of the new funding increase their advertising competition significantly more than firms whose leverage has increased. We undertake both an instrumental variables approach and a quot;reverse causalityquot; test to address the issue of the endogeneity of the capital structure and advertising decisions and show that it is indeed capital structure changes that influence the degree of advertising competition. We also find that the reaction of the sample firms' industry rivals is influenced as well by their capital structures. Specifically, we find that a rival firm responds more (less) aggressively - relative to its' peers - in the increase of its' own advertising, if it is less (more) levered than the sample firm in its' industry that has initiated the more intense advertising competition. Overall, our results support the view that financial leverage appears to have a quot;dampeningquot; effect on the intensity with which a firm chooses to compete in the product market.
Author: Murillo Campello Publisher: ISBN: Category : Languages : en Pages : 32
Book Description
This paper provides firm- and industry-level evidence on the effects of capital structure on product market outcomes for a large cross-section of industries. The analysis uses shocks to aggregate demand as surrogates for exogenous changes in the product market environment, dealing with concerns about the endogenous nature of the relation between financial structure and competitive performance. I find that debt financing has a negative impact on firm (relative-to-industry) sales growth in industries where rivals are relatively unlevered during recessions, but not during booms. In contrast, no such effects are observed for firms competing in high-debt industries. At the industry level, I find that markups are more countercyclical when industry debt is high. The cyclical dynamics I find for firm sales growth and for industry markups are consistent with Chevalier and Scharfstein's (1996) prediction that firms that rely more heavily on external financing are more prone to boost short-term profits at the expense of future sales in response to negative shocks to demand, and that the competitive outcomes resulting from such actions depend on the financial structures of their industry rivals.
Author: Yongqiang Chu Publisher: ISBN: Category : Languages : en Pages : 39
Book Description
This paper develops a dynamic trade-off model to study the interaction between product market competition and capital structure. Firms make interdependent entry, investment, financing and default decisions. Trade-off between tax benefits, bankruptcy costs and strategic considerations in the product market determines optimal capital structure. The model delivers the following results that are consistent with empirical evidences: (1) Firms may have non-linear and non-monotonic reactions to their competitors' change of leverage, depending on their original levels of leverage; (2) The within-industry variation of leverage can be large, because incumbents and entrants use leverage strategically differently; (3) Entrants have higher leverage than incumbents in equilibrium, because the incumbents use lower leverage to gain strategic advantages over the entrants.
Author: David J. Smith Publisher: ISBN: Category : Languages : en Pages : 50
Book Description
We investigate whether the capital structure of New Zealand firms influences their product-market performance in the period from 1984 to 2008. Our main findings are that the use of leverage by publicly listed New Zealand companies leads to an increase in relative-to-industry sales growth, but a decrease in relative-to-industry return on assets (ROA). We also conduct a reverse causality test by examining whether sales growth and ROA influence leverage. We find no evidence that sales growth has an impact on the use of debt, but significant evidence that ROA is negatively correlated with its use. Our results suggest that New Zealand firms use debt to compete more aggressively in their product markets, even though this strategy comes at a cost of lower relative-to-industry profitability. A possible explanation for this behaviour is the more competitive trading environment that has developed in New Zealand over the last 25 years.
Author: Lee Greer
Author: Gordon M. Phillips
Author: Judith A. Chevalier
Author: Hae Won (Henny) Jung
Author: Gustavo Grullon
Author: Daniil Vladimirovich Osipov
Author: Ernesto Santiago Schargrodsky
Author: Murillo Campello
Author: Yongqiang Chu
Author: David J. Smith