Three essays on market structure and capital structure

After the Modigliani-Miller theorem (1958), a lot of the literature on corporate finance and industrial organization has examined capital structure and market structure separately. My dissertation shows that the firm\u27s capital structure is affected by its basic conditions and the market structure, and that capital structure affects the dynamics of market structure. In the first essay, it is shown that managers who act in the interests of corporate insiders behave more (less) aggressively if the firm has more debt, when firms compete with quantities (prices) in the product market. The equilibrium quantities (prices) are higher than in the traditional Cournot (Bertrand) duopoly if the products are strategic substitutes (strategic complements). Therefore, according to the firms\u27 basic conditions and the market structure parameters, industries can have different capital structures, and firms which are apparently similar in the same industry can have different capital structures. Less risky industries tend to have a higher leverage ratio than more risky industries. The second essay examines the role of financial structure in capacity entry-deterring investment. It is shown that both financial structure and capacity investment have a precommitment role in preventing entry under quantity competition. A potential entrant with a very low entry cost can be deterred by debt financing. When firms compete with price in the post-entry game, however, the incumbent firm does not use debt financing in order to prevent entry, whereas the potential entrant uses debt financing in order to enter. The third essay examines the gains from takeover (acquisition and merger) as an alternative way of direct entry under entry barriers. By acquisition, the potential entrant can eliminate his strategic disadvantage, but must produce output within the target firm\u27s capacity. Only when the potential entrant\u27s ability is close to the target firm, does it prefer acquisition to direct entry. When total surplus is considered, takeover by the potential entrant with an equal or lower ability should be criticized for reducing total welfare