We investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm’s leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms’ competitive behavior in the product market in their capital structure decisions.

Additional Metadata
Keywords Bertrand competition, Cournot competition, Strategic debt, demand and cost uncertainty, leverage
JEL Perfect Competition (jel D41), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M)
Publisher Erasmus Research Institute of Management (ERIM)
Persistent URL hdl.handle.net/1765/10504
de Jong, A, Nguyen, T.T, & van Dijk, M.A. (2007). Strategic Debt: Evidence from Bertrand and Cournot Competition (No. ERS-2007-057-F&A). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/10504