Strategic interaction of capital structures: A spatial econometric approach

In this article, we suggest an alternative setting for empirically examining firms' strategic interaction in choosing their capital structure. Following Lyandres (2006)'s theoretical model, this article explicitly focuses on how the competitive interaction in output market may induce a firm to take the rival firms' capital structure into account in deciding its own capital structure. It is also shown that the direction of such strategic response depends on whether the output market competition is in strategic substitutes or in strategic complements. A spatial regression model is introduced to test the relationship between firms' financial choices and their product market strategies. The empirical evidence suggests that inclusion of the spatially lagged term of a firm's leverage could be empirically significant in explaining the optimal choice of a firm's financial structure. (c) 2012 Elsevier B.V. All rights reserved.