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Adugna Jiregna Geneti

Article Summary

Capital Structure and Interaction among Firms in Output Markets: Theory and Evidence.
Journal of Business 79 (5), Sep 2006, Evgeny Lyandres, Rice University, p 2381 ± 2421.´


This is a summary of the basic concepts of the article mentioned and provides insights learned.
What are the effects of the interaction among ¿rms in output markets on their ¿nancial and
operating choices?

This article ³Capital Structure and Interaction among Firms in Output Markets´ examines the
effects of the interaction among ¿rms in output markets on their ¿nancial and operating choices.
This article exposes the significance of the relations between the extent of competitive
interaction among ¿rms in output markets, their capital structures, and their operating strategies.
The article focuses on developing a model that examines the relations between the extent of
competitive interaction among ¿rms in output markets, their capital structures, and the
aggressiveness of their operating strategies. A test to the model is also presented with predicted
result using adequate data to support the model.

This article also provides us with information about the majority of optimal capital structure
models that they are developed in a single-¿rm framework and do not consider the interaction
among ¿rms in output markets because of an implicit assumption that ¿rms¶ ¿nancial, operating,
and investment decisions do not affect and are not affected by those of their rivals precludes
strategic capital structure choices.

Mn this article it has been discussed adequately about Capital Structure and Mnteraction among
Firms in Output Markets. The basic concept in this article has no limitation though it is based on
two sample firms. The author of the article declares that the question of limitation to a speci¿c
form of product market competition is not likely because the model developed shows that,
regardless of whether ¿rms¶ product market choices are strategic substitutes or complements the
stronger the influence of ¿rms¶ strategies on their rivals¶ value functions and resulting operating
strategies, the larger the strategic bene¿t of debt. However, under imperfect competitions, some
other researches indicate that debt is, in fact, a disadvantage. But to reconcile the theory with the
evidence by incorporating firms¶ relations with their suppliers, it can be evidenced that although
debt financing improves a firm¶s input sourcing efficiency it could also benefit the firm¶s rivals
by lowering their input costs in a model of strategic firm-rival interactions under imperfect
competition and incomplete contracting. This effect offsets the benefits due to aggressive
product market strategies that result from increased debt. Under certain conditions this subsidy
effect is sufficiently strong that debt is suboptimal in equilibrium and leads to an increase in
rival¶s shareholder value.

Mt is shown in the article that a ¿rm¶s optimal leverage is related to its operating strategy
affecting its rivals¶ value functions. This in turn results in optimal output market choices.

Mt is also emphasized in the article that alternative frameworks such as oligopolistic/

monopolistic competition which is basically price competition don¶t analyze the aspect of the
links between the extent of competitive interaction among ¿rms, their optimal leverage, and the
aggressiveness of their operating strategies and it is demonstrated that the study/article examines
this at large.


The presented test to the model using two proxies for the extent of competitive interaction
among ¿rms is intuitive and scientific. The predicted result is tested using data of considerable
amount of period. This shows that the empirical evidence of the model used is supported with
precisely defined data.

Mt is clearly implied that strategy and finance are close and grow together. Mt is necessary to
match strategy and investment plans with financing requirements, complementing external
source of finance to strategies for corporate development. A good integration between strategy
and finance dimensions can be equivalent to a competitive weapon.

The interaction between financing and real decisions creates a situation in which high or low
debt can compromise a firm¶s ability to take advantage of strategic options. The need to study in
greater depth the interaction between real decisions and financing, with respect to interactions
with financial and non-financial stakeholders, is a topic of interest to academics and to the
business community.

Mn this article it is demonstrated by a stylistic model that there is a positive relation between
¿rms¶ optimal leverage and the extent of competitive interaction in their industries. Mt is not
limited to a speci¿c type of product market competition. The model demonstrates that, regardless
of the type of competition in output markets, the extent of competitive interaction among ¿rms
positively affects their optimal leverage when-ever debt carries a strategic advantage.
The research has been largely theoretical and empirical examination. A robust research design
and data set may offer interesting approaches to understanding how product-market behavior
affects capital structure.

The article enhanced my understanding in that it very important to analyze the links between
competitive interaction among ¿rms and their operating strategies. This concept has contributed
to my knowledge of business ideas and interaction which will help me consult firms and it is
applicable in my small business firm. Mt helped me to have a new way of outlook on a problem.
Mt brings together several concepts in an insightful way that has not been done before. Also, it is
relevant to managerial problems in the business today. The issues addressed introduced in a way
that their relevance to practice is evident. The result in the article is useful to researchers and


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