DP16567 Dynamic Strategic Corporate Finance: A Tug of War with Financial Frictions

Author(s): Ulrich Doraszelski, Joao F Gomes, Felix Nockher
Publication Date: September 2021
Keyword(s): Financial Frictions, industry dynamics, Price and investment competition
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16567

Access to capital markets plays a key role for the evolution of an industry over time. We develop a benchmark theoretical setting that integrates core corporate finance insights about the impact of financial frictions on investment with those from industrial organization on dynamic competition and industry evolution under perfect capital markets. Using state of the art computational tools to systematically detect and evaluate multiple equilibria and to thoroughly explore the parameter space of our model, we show how, depending on key industry characteristics such as market size, financial frictions impact firms' pricing and investment strategies and the degree of industry concentration.