Affiliation:
1. MIT Sloan School of Management, USA
2. Penn State University, USA
Abstract
Abstract
We develop a model of optimal capital structure in imperfectly competitive markets by focusing on a duopoly. The model endogenizes both the financing and investment decisions of firms. We show that in equilibrium the industry leader uses debt conservatively, while the follower uses debt more aggressively and, as the result, defaults first. The model generates novel predictions about the leverage choices of the leader and the follower, their default likelihood, and the degree of leverage dispersion between competing firms. These predictions are strongly supported by the data. (JEL G13, G34, L13)
Publisher
Oxford University Press (OUP)
Subject
Economics and Econometrics,Finance,Business and International Management
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