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Capital Structure And Product Market Rivalry: How Do We Reconcile Theory And Evidence?

February 1995

Working Paper Number:

CES-95-03

Abstract

This paper presents empirical evidence on the interaction of capital structure decisions and product market behavior. We examine when firms recapitalize and increase the proportion of debt in their capital structure. The evidence in this paper shows that firms with low productivity plants in highly concentrated industries are more likely to recapitalize and increase debt financing. This finding suggests that debt plays a role in highly concentrated industries where agency costs are not significantly reduced by product market competition. Following the empirical evidence we introduce the "strategic investment" effects of debt and argue that this effect, in conjunction with agency costs, appears to fit the data.

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:
investment, market, economist, sale, agency, financial, finance, financing, leverage, oligopoly, capital, bankruptcy, profit, revenue, debt, contract, equity, equilibrium, funding

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:
Annual Survey of Manufactures, Bureau of Labor Statistics, Longitudinal Research Database, Center for Economic Studies, Total Factor Productivity, Cobb-Douglas, University of Maryland, Federal Reserve Bank

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