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The Strategic Behavior of Firms with Debt

Published online by Cambridge University Press:  16 December 2016

Jérôme Reboul  and
Anna Toldrà-Simats
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Abstract

We empirically study the strategic behavior of levered firms in competitive and noncompetitive environments. We find that regulation induces firms to increase leverage, and this reduces their ability to compete when deregulation occurs. Large and small levered firms adopt different strategies upon deregulation. Whereas more levered small firms charge higher prices to increase margins at the expense of market shares, highly levered large firms prey on their rivals by increasing output and reducing prices to increase their market shares. The difference in their behavior is due to differences in their probability of bankruptcy and their financing constraints.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 5 , October 2016 , pp. 1611 - 1636
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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