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Oligopoly, Financial Structure and Bankruptcy Risk

Universidade de Évora
Colégio Espírito Santo - Sala 124

08/10/2013 01:00 pm

Magali Costa (Inst. Politécnico de Leiria)

Resumo / Abstract: The aim of this paper is to analyze the equilibrium bankruptcy risk in a two-stage duopoly model, where firms decide their financial structure in the first stage of the game and take their output market decisions in the second stage of the game. Using the framework of Brander and Lewis (1986) we show that the bankruptcy risk depends on the financial structure and output market decisions. We analyze the impact of changing the parameters of the model (level of demand uncertainty, parameters that affect both firms and firm specific parameters) on the equilibrium bankruptcy probabilities. This analysis is done both for the equilibrium in the second stage of the game (for fixed debt levels) as well as for the subgame perfect equilibrium. We show that the bankruptcy risk depends both on the exogenous level of uncertainty and on the financial structure and product market equilibrium decisions. In other words, great part of the bankruptcy risk is endogenously determined.

Keywords: Capital structure; Product market competition; Bankruptcy risk.

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