Imperfect competition in financial markets and capital structure |
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Authors: | Sergei Guriev Dmitriy Kvasov |
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Affiliation: | aNew Economic School, Moscow, Russian Federation;bCEPR, London, United Kingdom;cUniversity of Auckland, New Zealand |
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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. |
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Keywords: | Capital structure Pecking order theory of finance Oligopoly in financial markets Second degree price discrimination |
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