Gordon M. Phillips R.H. Smith School of Business, University of Maryland, College Park, USA (Received December 1991; final version received December 1993).
Abstract
This paper tests for changes in firms' production and pricing decisions in four industries in which firms have sharply increased their financial leverage. The analysis of product price and quantity data shows that industry product market decisions are associated with capital structure. In three industries, output is negatively associated with the average industry debt ratio. In the one industry which shows a positive association between output and debt ratios, rival firms have low financial leverage and entry barriers are relatively low. Analysis of executive compensation data supports the hypothesis that managers' incentives to maximize shareholders' wealth increase following recapitalization.
Keywords: Capital structure; Product markets; Strategic interaction
JEL classification: G32: L22
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Gordon Phillips
College of Business and Management
University of Maryland
College Park MD 20742-1815, USA