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.
Subject: Corporate Finance/Capital Structure (Theoretical)
Clayton: (212) 998-0309 mclayton@stern.nyu.edu
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