Product Market Competition And Firms' Financing Behavior In China

On the basis of the SCP paradigm, the competitive behavior of oligopoly firms is determined by the market structure, but based on Chicago school theory, the external competitive pressure determines their competitive behavior. In fact, it is because of its financial condition that those oligopoly firms win, and their debt financing behavior changes the competition condition of product market, that is to say, capital structure can affect product market competition as well as market performance. Then, how do the firms in pursuit of share-holder value maximization make decision of optimized capital structure? Based on Brander and Lewis's model "limited liability effect" in 1986, this paper establishes a two-step duo-oligopoly game model, by which the strategic effect of debt financing under the uncertain product market demand is particularly reviewed, as well as the impact of product market competition, uncertain product demand etc. on firms' financing behavior. The model indicates that firm will enhance its production raising its financial leverage, but many a positive study didn't get to this point. The paper amends this model, and studies the impact on financing behavior of suppliers' external economy of scale and indirect cost of financial distress. This paper analyzes the negative effect of debt financing strategy under the condition that upstream firms' external economies of scale is powerful, indicates that it is the key factor of debt financing that external economies of scale is weak, and further deduces that debt financing wave will be drown forth with the existence of external economies of scale. Firm's financing behavior will also be impacted by financial distress cost, whose cost is determined by firm size, industry concentration, product specialization, R&D expenditure and industry prospect. So, firm will restrain its leverage by its own when making allowance of the indirect cost of financial distress.Through the positive studies to China's listed companies, the asset liability rate of public enterprises, which have regional monopoly power and stable revenue, is lower than those competitive industries that have great uncertain revenue. This is inconsistent to Western corporate finance theory, which indicates that the capital risk relocation efficiency of China's stock market is very low. At the end of the paper, the author expatriates how to finance strategically for China's firms, and puts forward that capital market condition and firms' own financial status as well as product market competition should be considered for capital structure decision-making, which is significant to the financing decision-making of China's firms.