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Imperfect competition in financial markets and capital structure

Author

Listed:
  • Sergei Guriev

    (New Economic School, Moscow, and CEPR)

  • Dmitriy Kvasov

    (University of Auckland)

Abstract
We consider a model of corporate nance with imperfectly competitive fi nancial intermediaries. Firms can fi nance projects either via debt or via equity. Because of asymmetric information about fi rm's growth opportunities, equity fi nancing involves a dilution cost. Nevertheless, equity emerges in equilibrium whenever fi nancial intermediaries have sufficient market power. In the latter case, best fi rms issue debt while the less pro table firms are equity-fi nanced. 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 fi rms switch from equity to debt nancing. This in turn decreases average quality of equity-fi nanced pool, so other intermediaries also shift towards more debt.

Suggested Citation

  • Sergei Guriev & Dmitriy Kvasov, 2009. "Imperfect competition in financial markets and capital structure," Working Papers w0151, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0151
    as

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    References listed on IDEAS

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    Cited by:

    1. Yong-Bo Wang & Jin-Ray Lu, 2016. "A Supply-Lock Competitive Market for Investable Products," Asian Development Policy Review, Asian Economic and Social Society, vol. 4(4), pages 127-133, December.
    2. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers 123, Centre for European Policy Studies.

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    More about this item

    Keywords

    capital structure; pecking order theory of fi nance; oligopoly in financial markets; second degree price discrimination;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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