Debt, Investment, and Product Market Competition
January 1999
Matthew J. Clayton
ABSTRACT
Recent empirical literature on the interaction between capital structure, investment, and product market decisions
suggests that debt leads to lower investment expenditures and weaker product market competition. Theoretical literature
in this area has been unable to fully explain this finding (perhaps because all theoretical papers look only at
two of the above decisions). This paper develops a model which examines all three decisions and shows that debt
and investment can be substitutes in a model where firms rationally take on debt. Furthermore, it is demonstrated
that when firms compete with prices in the product market, an increase in debt leads to lower investment and higher
prices.
Clayton: (212) 998-0309 mclayton@stern.nyu.edu
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