| Abstract: | We examine the importance of industry to firm-level financialand real decisions. We find that in addition to standard industryfixed effects, financial structure also depends on a firm’sposition within its industry. In competitive industries, a firm’sfinancial leverage depends on its natural hedge (its proximityto the median industry capital–labor ratio), the actionsof other firms in the industry, and its status as entrant, incumbent,or exiting firm. Financial leverage is higher and less dispersedin concentrated industries, where strategic debt interactionsare also stronger, but a firm’s natural hedge is not significant.Our results show that financial structure, technology, and riskare jointly determined within industries. These findings areconsistent with recent industry equilibrium models of financialstructure. |
