Relationship between debt and market power: empirical evidence using panel data models

Using panel models, this article shows there is a negative relationship between the level of debt of Portuguese companies quoted on the Stock Exchange and their market power. To test the robustness of the result obtained, we test the impact of debt in the previous period on market power in the current period, also using control variables. In all circumstances, we found a negative and statistically significant relationship between debt and market power. The results show that companies use debt not to adopt aggressive strategies in an attempt to increase their market share, but rather with the aim of disciplining managers’ actions so that they do not make the company grow beyond the desired optimal level. Furthermore, companies with a higher level of liquidity and lower level of debt adopt more aggressive strategies. The relationship between control variables and market power allows us to conclude that larger companies with greater growth have greater market power, while companies with higher levels of security have less market power.