The Strategic Behavior of Firms with Debt Articles uri icon

publication date

  • November 2016

start page

  • 1611

end page

  • 1636

issue

  • 5

volume

  • 51

International Standard Serial Number (ISSN)

  • 0022-1090

Electronic International Standard Serial Number (EISSN)

  • 1756-6916

abstract

  • We empirically study the strategic behavior of levered firms in competitive and noncompetitive environments. We find that regulation induces firms to increase leverage, and this reduces their ability to compete when deregulation occurs. Large and small levered firms adopt different strategies upon deregulation. Whereas more levered small firms charge higher prices to increase margins at the expense of market shares, highly levered large firms prey on their rivals by increasing output and reducing prices to increase their market shares. The difference in their behavior is due to differences in their probability of bankruptcy and their financing constraints.

keywords

  • leverage; competition; firmsize; regulation; endogeneity