Imperfect competition in financial markets and capital structure

Sergei Guriev, Dmitriy Kvasov

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

We consider a model of corporate finance with imperfectly competitive financial intermediaries. Firms can finance projects either via debt or via equity. Because of asymmetric information about firms' growth opportunities, equity financing involves a dilution cost. Nevertheless, equity emerges in equilibrium whenever financial intermediaries have sufficient market power. In the latter case, best firms issue debt while the less profitable firms are equity-financed. We also show that strategic interaction between oligopolistic intermediaries results in multiple equilibria. If one intermediary chooses to buy more debt, the price of debt decreases, so the best equity-issuing firms switch from equity to debt financing. This in turn decreases average quality of equity-financed pool, so other intermediaries also shift towards more debt.

Original languageEnglish
Pages (from-to)131-146
Number of pages16
JournalJournal of Economic Behavior and Organization
Volume72
Issue number1
DOIs
Publication statusPublished - 2009 Oct 1
Externally publishedYes

Keywords

  • Capital structure
  • Oligopoly in financial markets
  • Pecking order theory of finance
  • Second degree price discrimination

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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