Capital Structure, Strategic Competition, and Governance

This thesis consists of four studies on the interactions of capital structure and product market competition, and on several aspects of governance, firm financing and growth. The first study investigates how competitive behavior and market uncertainty affect the capital structure of a firm in the U.S. manufacturing. We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand samples. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. In the second study, we examine the joint determination of capital structure and market share in U.S. manufacturing firms. We provide evidence that in Cournot (Bertrand) competition, leverage negatively (positively) affects market share. Market share is shown to have a negative impact on leverage in Cournot firms, but no impact on leverage in Bertrand firms. Both studies highlight the role of firms’ competitive behavior in the product market in their capital structure decisions. The third study analyzes the importance of firm-specific and country-specific factors in the leverage choice of firms from 42 countries around the world. We find that firm-specific determinants of leverage differ across countries, while prior studies implicitly assume equal impact of these determinants. Although we concur with the conventional direct impact of country-specific factors on the capital structure of firms, we show that there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage. Finally, in the forth study, we provide a firm-level analysis of the relation between corruption, growth, and public governance in Vietnam. Our results indicate that corruption significantly hinders the growth of Vietnam’s private sector. However, corruption is not detrimental for the growth in state sector. Our study emphasizes the role of local institutions and governance factors in affecting corruption

Strategic Debt: Evidence from Bertrand and Cournot Competition

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