strategic responses of incumbents to new entry the effect of ownership structure capital structure and focus we examine how certain firm and market specific characteristics affect incumbent firms responses to new entry into their local markets data comes from the discount department store industry where wal mart entered a large number of markets in a short period of time consistent with existing research larger and more profitable incumbents respond more aggressively to wal mart s entry while more highly levered incumbents respond less aggressively also there is evidence that incumbent managers fight harder possibly overinvest when their job is at greater risk and high managerial ownership appears to reduce this agency problem incumbent firms behave differently in markets under attack by wal mart than in markets not yet threatened suggesting that some of the documented responses are specific to walmart s entry article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

debt in industry equilibrium this article shows 1 how entry and exit of firms in a competitive industry affect the valuation of securities and optimal capital structure and 2 how given a trade off between tax advantages and agency costs a firm will optimally adjust its leverage level after it is set up we derive simple pricing expressions for corporate debt in which the price elasticity of demand for industry output plays a crucial role when a firm optimally adjusts its leverage over time we show that total firm value comprises the value of discounted cash flows assuming fixed capital structure plus a continuum of options for marginal increases in debt article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

strategic debt and patent races abstract most traditional studies of rd under a flow cost model debt induces lower rd that is in a more general model where debt has other uses the total debt level is reduced when the strategic effect is included our empirical study gives support to the fixed up front r d result that higher debt levels are associated with lower overall r d expenditures

corporate debt and output pricing in developing countries industry level evidence from turkey abstract the present study is an application of capital structure theory to developing economies where markets are commonly imperfect the industry level data of turkey is used as a benchmark case to investigate the effects of corporate debt on output pricing which in return might have critical implications for stabilization theory the panel estimations on the major two digit industries reveal two basic findings first short term debt leads to an increase in output prices while long term debt has the opposite effect and short term but not long term debt has a cyclical influence on prices second the inflationary effect short term debt implies a lower capital gain and induces higher prices while the effect long term debt implies a higher capital gain and induces lower prices given the predominant share of short term debt in most developing countries these findings suggest an explanation for inflation inertia on the side of corporate sector

strategic transparency and informed trading will capital market integration force convergence of corporate governance dominant investors can influence the publicly available information about firms by affecting the cost of information collection under strategic competition transparency results in higher variability of profits and output thus lenders prefer less transparency since this protects firms when in a weak competitive position while equity holders prefer more market interaction creates strategic complementarity in gathering information on competing firms thus entry by transparent competitors will improve price informativeness moreover as the return to information gathering increases with liquidity increasing global trading may undermine the ability of bank control to keep firms opaque

collusion and the banking structure of a duopoly the author shows that in credit relationships the choice of a lender may become a determinant of the extent of competition in downstream industries in the presence of imperfect output markets and asymmetric information in financial markets members of an industry may achieve a partial collusion in the output market by borrowing from the same bank in an oligopoly debt is procompetitive as it gives incentives to the borrowing firm to undertake an aggressive output strategy as both firms borrow the industry becomes more competitive and riskier the firms debt value is decreased a common lender can better control these incentive effects and hence limit the extent of competition in the output market

the strategic use of debt reconsidered abstract we consider a two stage differentiated goods duopoly model with demand uncertainty linking firms capital structure choice to their output market decisions using a numerical analysis we study how the equilibrium of the model is affected by demand volatility and the substitutability between products in doing so we correct a mistake in earlier papers in this literature most importantly we find that the equilibrium debt level decreases as demand becomes more volatile

capital structure and product market rivalry how do we reconcile theory and evidence this paper presents empirical evidence on the interaction of capital structure decisions and product market behavior we examine when firms recapitalize and increase the proportion of debt in their capital structure the evidence in this paper shows that firms with low productivity plants in highly concentrated industries are more likely to recapitalize and increase debt financing this finding suggests that debt plays a role in highly concentrated industries where agency costs are not significantly reduced by product market competition following the empirical evidence we introduce the strategic investment effects of debt and argue that this effect in conjunction with agency costs appears to fit the data this abstract was borrowed from another version of this item

investment capital structure and complementarities between debt and new equity we study simultaneous investment and financing decisions made by incumbent owners in the presence of capital market imperfections we present a theory for how the optimal combination of debt and equity financing depends on the firm s internal funds we identify complementarities between the two financial instruments we test these predictions empirically with panel data on 3 119 corporations in the compustat database our estimates using instrumental variable techniques support our theoretical predictions regarding the link between internal funds and capital investments as well as the interaction effects between debt and new equity we explore implications for managers financiers and policy makers

determinants of portfolio performance ii an update 1991 determinants of portfolio performance ii an update financial analysts journal vol 47 no 3 pp 40 48

sector style region explaining stock allocation performance the importance of asset allocation policy in stock bond portfolios is widely recognized drawing a parallel for equity only portfolios this study analyzed the importance of allocation by economic sector and by size and style in purely u s stock portfolios and the importance of regional allocation policy in international stock portfolios the study found that allocation policy explains one third to nearly three quarters of among fund variation in returns nearly 90 percent of across time variation and more than 100 percent of the level of stock portfolio returns

estimating product market competition methodology and application abstract in oligopolies firms behave strategically and commit to actions that elicit favorable responses from rivals firm actions consequently are a function of the nature of these strategic interactions in this paper we develop a methodology for the empirical estimation of strategic interactions in product markets we then apply our measure of strategic interactions to ceo compensation we use quarterly data on profits and sales from compustat to estimate the slope of firm s reaction function when the slope is negative and marginal profits decrease with an increase in the rival s actions the firm is classified as a strategic substitute when the slope is positive and marginal profits increase with an increase in the rival s actions the firm is classified as a strategic complement as predicted by theory we find significant evidence that strategic substitutes decrease the pay for performance incentives of their ceos on the other hand strategic complements significantly increase ceo pay for performance incentives the empirical measure developed can be used to test a wide variety of strategic models

a micromodeling approach to investigate the advertising sales relationship the purpose of this paper is to derive a model of advertising effects on the firm s sales a micromodel is postulated and aggregated across individuals and over time to produce a macromodel of the aggregate sales advertising relationship for a single product the micromodel postulated is very simple it incorporates two factors reach of the ads and rate of decay of their effectiveness over time this approach to modeling advertising effects is shown to be fruitful in several respects 1 the coefficients of the aggregate equation are easily interpretable in terms of the reach and decay parameters 2 the model derived is nonlinear yet estimable 3 a special case of the model is very similar to lag models that have been in use 4 the model can be used whatever the unit of time is 5 the carryover effect of advertising as commonly defined is not constant but depends upon the previous spending levels and 6 the model helps illustrate that the duration of advertising may be greatly overstated if aggregate lagged dependent variable models are simplistically interpreted

financial signalling and the deep pocket argument this article provides a formal representation of telser s 1966 deep pocket argument by considering a model in which the entrant s and the incumbent s financial structures are endogenous the entrant s financial vulnerability may be explained by informational asymmetries in financial markets financiers are uncertain of the entrant s true value but they know the incumbent s true worth both firms have to finance a fixed expenditure before starting production in equilibrium the incumbent finances with equity while the high value entrant comes into the market heavily leveraged compared with the incumbent this provides an incentive for the incumbent to engage in predatory practices such as a price war to exhaust the entrant financially and cause his bankruptcy

product market competition and optimal debt contracts the limited liability effect revisited abstract this paper shows that asymmetric information between lenders and borrowers plays a crucial role in the existence of interactions between financial decisions and output market strategies lenders offer an optimal renegotiation proof financial contract which resembles a standard debt contract computing cournot equilibria debt causes firms to compete less aggressively the usual positive limited liability effect on quantities is offset by a negative one due to endogenous financial costs

recovering measures of advertising carryover from aggregate data the role of the firm s decision behavior data interval bias the biased estimation of advertising carryover in aggregate data can be viewed as a misinterpretation of the aggregate advertising sales relationship due to missing micro advertising data this paper argues that if the researcher does not explicitly model the firm s advertising decisions he will incorrectly interpolate the missing data and thereby allow the firm s decision behavior to influence inferences about advertising carryover drawing upon a general model of advertising decision behavior the expected aggregate form of the koyck relationship is developed and compared to existing bias correction methodologies although it is difficult to find any parsimonious procedure which is robust with respect to all types of decision behavior allowing lagged advertising to enter the classical koyck equation emerges as a simple method of obtaining a reasonable estimate of advertising carryover in aggregate data

evidence on the impact of the agency costs of debt on corporate debt policy in the last several years there has been increased theoretical emphasis on the agent principal problem as it applies to corporate finance this paper is an attempt to empirically test for the presence of the agency costs and their relation to the debt policy of corporations we find that firms with higher insider ownership have greater debt ratios than firms with lower insider ownership which may be explained by the agency costs of debt and or the agency costs of equity other regression results tend to confirm the theoretically optimal relationships put forth by myers we find that high growth firms use less debt rather than more debt high operating risk firms use more debt rather than less debt and firm size appears to be uncorrelated to the level of debt

anticompetitive financial contracting the design of financial claims this paper presents the first model where entry deterrence takes place through financial rather than product market channels in standard models of the interaction between product and financial markets a firm s use of financial instruments deters entry by affecting product market behavior whereas in our model entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms we find that in order to deter entry the claims held on incumbent firms should be sufficiently risky i e equity in contrast to the standard branderlewis 1986 result that debt deters entry the model sheds light on the policy debate on the separation of banking as to whether banks should be permitted to hold equity in firms it also provides an explanation for why venture capitalists hold automatically convertible securities in start up firms

capital structure and output pricing in a developing country this paper uses the industry level data to investigate the effects of corporate debt on output pricing in a typical developing country the panel estimations on the major two digit industries reveal two basic findings first short term debt leads to an increase in output prices while long term debt has the opposite effect second short term debt but not long term debt is found to have cyclical effects on prices

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

real flexibility and financial structure an empirical analysis i examine the empirical relation between real flexibility and financial structure i test whether real flexibility increases debt capacity by lowering default risk and making assets more marketable or decreases debt capacity by facilitating risk shifting and asset substitution i measure real flexibility as the sensitivity of marginal production and investment decisions to variations in the economic environment i find that financial leverage is negatively related to production flexibility but positively related to investment flexibility this split in results suggests that although asset substitution facilitated by investment flexibility can be prevented contractually risk shifting facilitated by production flexibility is intractable copyright 2003 oxford university press

the commitment value of the debt a reappraisal abstract we analyze the strategic use of the debt in a duopoly model of cournot competition we consider a two stage model where debt acts as a commitment variable and we characterize subgame perfect equilibria we differ from several models based on the strategic value of the debt such as wanzenried wanzenried g 2003 capital structure decisions and output market competition under demand uncertainty international journal of industrial organization 21 171 200 in showing that if one assumes that the debt level acts as a commitment device it is incorrect to consider bankruptcy risk as a strategic variable we demonstrate properties concerning the influence of price volatility and product differentiation upon equilibrium values of production default risk and debt obligation

debt and the marginal tax rate abstract do taxes affect corporate debt policy this paper tests whether the incremental use of debt is positively related to simulated firm specific marginal tax rates that account for net operating losses investment tax credits and the alternative minimum tax the simulated marginal tax rates exhibit substantial variation due to the dynamics of the tax code tax regime shifts business cycle effects and the progressive nature of the statutory tax schedule using annual data from more than 10 000 firms for the years 1980 1992 i provide evidence which indicates that high tax rate firms issue more debt than their low tax rate counterparts

intertemporal aggregation of heterogeneous consumers abstract this paper deals with a relatively unexamined facet of stochastic brand switching models their connection to market share models we derive a composite market share model based on aggregation of heterogeneous markovian type individuals each purchasing a brand from the product class several times during the period of analysis the characteristics of this composite model are examined and interestingly suggest a markov type market share model moreover this examination sheds some light on a phenomenon uncovered in econometric studies of market share response to advertising the slow decay of the lagged market share term as the length of the measurement period is increased

debt investment and endowment accumulation the case of not for profit hospitals abstract not for profit hospitals benefit from special tax rules that allow state authorities to issue tax exempt bonds on their behalf which may affect their investment and financing choices hospitals may respond by increasing their investment in physical assets however they may also engage in tax arbitrage by using the tax exempt debt while maintaining endowment assets the paper combines data from tax information returns and the annual survey of hospitals by the american hospital association for 1993 1996 overall the results are consistent with substantial tax planning by not for profit hospitals of the us 55 9 billion in tax exempt liabilities of hospitals in 1996 as much as us 32 6 billion could have been eliminated if hospitals spent their endowments instead of borrowing furthermore controlling for hospital size in terms of revenues and operating assets endowment assets are associated with a higher ratio of tax exempt or total debt to operating assets in contrast endowment assets are not related to taxable debt suggesting that the effects of the endowment on borrowing are motivated by tax incentives investment and endowment accumulation regressions suggest that increases in debt increase both physical investment and endowment accumulation but these effects are concentrated among cash rich hospitals for which the effects on endowment accumulation effects are larger than the effects on physical investment

debt as an entry deterrent under bertrand price competition in recent studies of strategic debt little attention has been paid to the use of debt in deterring potential rivals i show that in a bertrand type industry where costs are uncertain an incumbent monopolist can deter entry by using debt to commit to a sufficiently low price if demand is uncertain deterrence is not possible and an incumbent will choose positive debt levels to induce softer post entry competition the results under demand uncertainty support recent empirical evidence that leverage is negatively associated with output and positively associated with prices

determinants of portfolio performance in order to delineate investment responsibility and measure performance contribution pension plan sponsors and investment managers need a clear and relevant method of attributing returns to those

a meta analysis of marketing communication carryover effects abstractto optimally set marketing communication marcom budgets reliable estimates of short term elasticities and carryover effects are required empirical generalizations from meta analyses of prior field studies can help guide these decisions however the last such meta analysis of marcom carryover effects was performed on koyck model based estimates collected before 1984 and was confined to mass media advertising the authors update and extend extant empirical generalizations via two meta analyses of carryover estimates compiled from studies encompassing personal selling targeted advertising and mass media advertising using diverse model forms until 2015 the first is focused on and utilizes 918 estimates of the carryover proportion of the total effect termed long term share of the total effect and the second focuses on 863 derivable estimates of 90 implied duration intervals the authors find the mean long term shares of the total effect for personal selling 687 and targeted advertisin

product market competition and the financing of new ventures this paper examines the interaction between venture risk product market competition and the entrepreneur s choice between bank financing and venture capital vc financing under bank financing a debt type contract emerges as optimal which allows the entrepreneur to retain full control of the venture and thus yields strong effort incentives as long as the entrepreneur can service the debt repayment however this leads to liquidation in the case of default making the venture s success quite sensitive to exogenous even temporary shocks that may hinder debt repayment under vc financing an equity type contract emerges as optimal although it is not sensitive to exogenous shocks this contract requires the entrepreneur to share a fraction of the rents with the financier thus yielding lower effort incentives for the entrepreneur there exists a threshold level of venture risk such that bank financing is optimal if and only if venture risk is below that threshold product market competition increases the value of stronger entrepreneurial incentives and thus increases the maximum level of risk the entrepreneur is willing to take before switching from bank financing to vc financing this is a robust result that is shown to hold in various models of competition including the hotelling salop dixit stiglitz and cournot to bertrand switch this paper was accepted by lee fleming entrepreneurship and innovation

capital market imperfections and countercyclical markups theory and evidence during recessions output prices seem to rise relative to wages and raw material prices one explanation is that imperfectly competitive firms compete less aggressively during recessions that is markups of price over marginal cost are countercyclical the authors present a model of countercyclical markups based on capital market imperfections during recessions liquidity constrained firms boost short run profits by raising prices to cut their investments in market share the authors provide evidence from the supermarket industry in support of this theory during regional and macroeconomic recessions more financially constrained supermarket chains raise their prices relative to less financially constrained chains copyright 1996 by american economic association

carryover effects and temporal aggregation in a partial adjustment model framework this paper discusses the impact of aggregating time series observations on the specification of an econometric model in the framework of a familiar sales response model temporally aggregated specifications are derived it is illustrated that different aggregation schemes provide different models each of them having appealing characteristics furthermore the derived specifications illustrate that frequently calibrated models are misspecified and as such provide biased estimates which significantly affect the interpretation of the results some suggestions are provided for estimating the exact specifications in such a way that the obtained parameter estimates provide correct insights into the underlying response process

why leverage affects pricing we explain and provide evidence for effects of leverage on pricing our model identifies two effects that either counteract or reinforce each other depending on the debt maturity structure i firms set higher prices underinvest in market share if they have more debt and ii firms engage in dynamic risk shifting by setting lower higher prices if the current debt obligation will be higher lower in the next period than in the present period using a unique dataset of owner managed hotels in austrian ski resorts we provide empirical evidence of both effects

estimating micro relationships from macro data a comparative study of two approximations of the brand loyal model under temporal aggregation the data interval bias issue in econometric studies of the relationship between advertising and sales first was discussed in jmr by clarke in 1976 within the last few years several studies report

the effect of taxes and depreciation on corporate investment and financial leverage this paper provides an analysis of the effect of corporate and personal taxes on the firm s optimal investment and financing decisions under uncertainty it extends the deangelo aad masulis capital structure model by endogenizing the firm s investment decision the authors results indicate that when investment is allowed to adjust optimally the existing predictions about the relationship between investment related and debt related tax shields must be modified in particular the authors show that increases in investment related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level in cross sectional analysis firms with higher investment related tax shields normalized by expected earnings need not have lower debt related tax shields normalized by expected earnings unless all firms utilize the same production technology differences in production technologies across firms may thus explain why the empirical results of recent cross sectional studies have not conformed to the predictions of deangelo and masulis

temporal aggregation the data interval bias and empirical estimation of bimonthly relations from annual data in an important study reviewing the literature on econometric studies of the relationship between advertising and sales clarke clarke darral g 1976 econometric measurement of the duration of advertising effects on sales j marketing res 13 november 345 357 concluded that the implied duration interval of the effects of advertising on sales were too long when the studies used annual data a theoretical explanation is provided here for the observation of parameter estimates which vary with the data interval employed in the analysis parameter estimates are developed on the basis of data aggregated at various levels of temporal aggregation and compared with theoretical values it is demonstrated that it is possible to recover bimonthly parameters when only annual data are available

the effect of leverage on bidding behavior theory and evidence from the fcc auctions this is an exploration of how bidding behavior of firms in various auctions is affected by their capital structure the theoretical model considers a first price sealed bid and an english auction we find that as debt levels increase firms tend to reduce their bids the lower bids give the competition incentives to reduce their bids as well these results are investigated empirically using data from the 1994 1995 fcc spectrum auctions consistent with the theoretical model higher debt levels of the bidding firm and of the competition tend to lead to lower bids additional determinants of bidding behavior in these auctions are also analyzed copyright 2002 oxford university press

capital structure decisions and output market competition under demand uncertainty abstract we consider a two stage differentiated goods duopoly model with demand uncertainty linking firms capital structure choice with their output market decisions the firms compete in quantities or prices on the market we explain how firms capital structure depends on specific output market characteristics such as substitutability between products and demand volatility we investigate whether strategic use of debt is able to mimic stackelberg leadership finally we consider the welfare effects of debt issue this paper contributes to the understanding of the firms capital structure decisions while specifically emphasizing the strategic use of debt it investigates the relationships between firms output market and capital structure decisions with respect to specific demand and supply characteristics

pricing exit and location decisions of firms evidence on the role of debt and operating efficiency abstract we compare pricing and exit decisions of discounters across the business cycle cities containing high debt and or low efficiency firms display higher prices during non recession years during recessions prices increase in cities with less efficient incumbents but decrease in cities with a mix of high and low debt firms high debt firms are more likely to exit cities with lower prices and high debt exiting firms are more likely to be efficient apparently low debt firms strategically lower prices during recessions to force exit of efficient financially constrained rivals weaker competitors face another cost new entrants locate closer

the importance of asset allocation this article discusses the impact on performance of the long term asset allocation policy relative to the impact of active management most of the variation in time series returns for a typical fund comes from general market movement the remaining variation comes about equally from asset allocation policy and active management

the impact of capital structure on advertising competition an empirical study this article examines the interaction between capital structure and advertising competition using a sample of firms that raise significant amounts of capital we find that firms whose financial leverage has decreased as a result of their new funding increase their advertising significantly more than firms whose leverage has increased we also find that these firms industry rivals respond less aggressively with their own advertising when they have more debt in their capital structure overall our results support the view that financial leverage has a dampening effect on the intensity with which a firm chooses to compete in the product market

license auctions when winning bids are financed through debt we study an auction where two licenses to operate on a new market are sold and winning bidders finance their bids on the debt market higher bids imply higher debts which affects product market competition when debt induces firms to compete more aggressively retail prices are lower than in a model without debt as are auction revenues when debt induces firms to compete less aggressively retail prices are higher than in a model without debt and the effect on auction revenues is ambiguous net firm profits are always higher than in a model without debt due to endogenous credit rationing

the equal importance of asset allocation and active management what is the relative importance of asset allocation policy versus active portfolio management in explaining variability in performance considerable confusion surrounds both time series and cross sectional regressions and the importance of asset allocation cross sectional regressions naturally remove market movements therefore the cross sectional results in the literature are equivalent to analyses of excess market returns even though the regressions were performed on total returns in contrast time series analyses of total returns do not naturally remove market movements time series analyses of excess market returns and cross sectional analyses of either total or excess market returns however are consistent with each other with market movements removed asset allocation and active management are equally important in determining portfolio return differences within a peer group finally an examination of period by period cross sectional results reveals why researchers using the same regression technique can get widely different results

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these

bankruptcy costs and the theory of oligopoly this paper examines the relationship between financial decisions and output decisions in oligopolistic markets assuming a duopoly market structure in which financial decisions and output decisions follow in sequence the authors analyze how bankrupt cy costs which are incurred when the firm is unable to meet current debt obligations affect the firm s behavior in output markets with fixed bankruptcy costs firms have an incentive to increase output le vels if they take on more debt proportional bankruptcy costs lead to a u shaped relationship between output and debt foresighted owners of firms are led to take into account the strategic output effects of financial structure when considering an optimal financial structure for the firm

how does industry affect firm financial structure we examine the importance of industry to firm level financial and real decisions we find that in addition to standard industry fixed effects financial structure also depends on a firm s position within its industry in competitive industries a firm s financial leverage depends on its natural hedge its proximity to the median industry capital labor ratio the actions of other firms in the industry and its status as entrant incumbent or exiting firm financial leverage is higher and less dispersed in concentrated industries where strategic debt interactions are also stronger but a firm s natural hedge is not significant our results show that financial structure technology and risk are jointly determined within industries these findings are consistent with recent industry equilibrium models of financial structure copyright 2005 oxford university press