Product Markets & Capital Structure

Question 1

Titman 1984

Answer 1

Kayhan briefly mentioned: “few product market competition models consider taht firms can compete on quality (as in Titman 84).

Question 2

Bolton and Scharfstein 1990 AER

Answer 2

Balancing anti-predation loosening of financial contraints with costs of exacarbating incentive problems.

Question 3

Chevalier 1995 AER

Answer 3

1. LBO announcement increases the market value of LBO chain’s local rivals.
2. Rivals more likely to enter/expand in local mkt if large share of incumbent firms undertook LBOs.
3. Suggests that leverage increases in late 1980’s led to softer product-market competition (LBO firms less competitive) in this industry.

Question 4

Phillips 1995 JF

Answer 4

Find that in the fiberglass, tractor trailer, and polyethylene industries output is negatively associated with average industry debt ratio. In gypsum industry, where there are low barriers to entry and rivals have low leverage, association between output and debt ratios is positive. Executive compensation data shows mgmt’s incentives to max shareholder wealth increase following recapatalization.