The relationship between capital structure and product market competition in US listed firms

Abstract: This study measures the effect of competition on leverage using unbalanced panel data from 4,957 US listed firms within 8 industries. To address the issues associated with concentration indexes, we contribute to the literature by using a new measure of competition – the Boone indicator which is based on efficiency. Initially results indicate a positive (negative) effect of competition (concentration) on leverage. Due to the distorting effect of the recent financial crisis, the sample was split into two sub-periods. From this it was determined that competition has a significant negative effect on capital structure when measured with the BI which is a theoretically robust proxy for competition. Accounting for non-linearity does not produce any significant results.