Richard Martin

"Debt financing and entry"
JEL codes: G32, L13
Keywords: firm specific capital, debt, entry, exit

Abstract: Traditional models of oligopoly, involving firm specific capital, implicitly assume that firms are financed solely by equity, whereas recent models, regarding the strategic benefits of debt, ignore the effect debt has on the commitment value of firm specific capital. The primary objective of this paper is to show that debt financing reduces the commitment value of firm specific capital, which implies that excessive debt financing can make entry profitable. We show this by introducing debt financing within the context of a traditional model of entry deterrence. Canadian data from the period 1984 to 1996 is generally consistent with the implications of this paper.