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
Externally publishedYes

Fingerprint

Equity
Financial markets
Market structure
Capital structure
Financial capital
Imperfect competition
Debt
Intermediaries
Financial intermediaries
Multiple equilibria
Costs
Asymmetric information
Equity financing
Debt financing
Dilution
Corporate finance
Market power
Project finance
Strategic interaction
Growth opportunities

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

Cite this

Imperfect competition in financial markets and capital structure. / Guriev, Sergei; Kvasov, Dmitriy.

In: Journal of Economic Behavior and Organization, Vol. 72, No. 1, 10.2009, p. 131-146.

Research output: Contribution to journalArticle

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