A Study On The Interaction Between Product-market Competition And Capital Structure

After Modigliani and Miller (1958,1963) blazed the trail in the study of modern capital structure theory, scholars in financial circles had been carrying out further studies on whether the capital structure is relevant to the value of the firm. However, most of the studies didn't relate the capital structure decision to the product-market competition. In the middle of 1980s,some financial economists, such as Brander and Lewis, Maksimovic, identified this problem, and pushed forward the study of the interactive effects between product-market competition and capital structure. Till now, the study of capital structure has been greatly expanded instead of only confining to one single firm. Compared to the more and more studies in western countries, the study in this field in China is few. Therefore, it's quite necessary to explore the interactive effects between product-competition and capital structure, based on the relevant achievements abroad and combined with the special background in China. This dissertation studies deeply the interactive effects between the product-market competition and capital structure. Hopefully, this dissertation aims to gain some achievements and put forward some valuable suggestions so that the firms in China can optimize their capital structure to meet the more and more competitive market.Altogether, there are six parts in this dissertation.The first part gives an overall review of the latest researches on capital structure theory, which focuses on corporate governance and industrial organization. Since the interactive effects is the major topic, this dissertation also gives a very detailed review on the capital structure literature, which is based on industrial organization theory, to form the foundation of this research, and meanwhile, provide the detailed progresses in this field for other researchers.The second part analyzes the aims of the firms, financial system and financial behaviors. With the application of incomplete contract theory, this dissertation clarifies the aim of maximizing shareholder's value from the perspective of firm's control right. Then, considering our country's financial system, theoretical study is employed to analyze the financial behavior within one single firm. Finally, the causes that lead to bank's loan expansion are stated clearly. The analysis shows that the intervening of government makes the bank violate the principle of maximizing its own utility and provides more credit loan. As a result, a large amount of low quality credit assets come into being. So can we get the same conclusion under the framework of industrial competition? The following three partsgive the answer to this question.The third part gives a description of product-market competition and the characteristics of capital structure. In transitional economy system, the competition in most product-market are out of order, some over-competition even exists in some industries. The main characteristics of capital structure in China are high debt-equity ratio and small proportion of internal financing. Furthermore, this dissertation discus the effects of irrational investment on capital structure due to the insider control and product-market competition. The fourth part of this dissertation focuses on the influence of capital structure decisions on the product-market competition behavior. Because different debt covenant has different influence on the product-market competition, this dissertation illustrates how the debt financing influences the competitor in product, price competition and the behavior of collusion by introducing the classical theoretical models. Then, this dissertation designs a non-standard debt contract, which includes the soft budget constraint and the possibility of debt renegotiations, and analyze the influence of debt financing on the product-market competition under this debt contract. The study of this part illustrates: firstly, due to the limited liability, the standard debt contract plays an important role of strategy commitment in the produ...