DP12151 Capital Structure Under Collusion

Author(s): Daniel Ferr├ęs, Gaizka Ormazabal, Paul Povel, Giorgio Sertsios
Publication Date: July 2017
Keyword(s): Capital Structure, cartels, Collusion, Financial Leverage, Financial Policies, Trigger Strategies
JEL(s): G32, L12
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12151

We study the financial leverage of firms that collude by forming a cartel. We find that cartel firms have lower leverage ratios during collusion periods, consistent with the idea that reductions in leverage help increase cartel stability. Cartel firms have a surprisingly large economic footprint (they represent more than 20% of the total market capitalization in the U.S.), so understanding their decisions is relevant. Our findings show that anti-competitive behavior has a significant effect on capital structure choices. They also shed new light on the relation between profitability and financial leverage.