Imperfect Competition in Financial Markets and Capital Structure

Sergei Guriev , Dmitriy Kvasov (1)

1 University of Adelaide

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.

Mots clés: Capital structure; Pecking order theory of finance; Oligopoly in financial markets; Second degree price discrimination

Domaines: Economies et finances

Sergei Guriev, Dmitriy Kvasov. Imperfect Competition in Financial Markets and Capital Structure. Journal of Economic Behavior and Organization, 2009, 72 (1), pp.131 - 146. ⟨10.1016/j.jebo.2009.05.004⟩. ⟨hal-03415678⟩