The effect of product market competition on capital structure: empirical evidence from the newspaper industry

Abstract

This paper analyzes whether the extent of product market competition that a firm faces affects its capital structure. We study the effect of competition on leverage for firms acting in the US newspaper industry. Potential endogeneity between market structure and capital structure is addressed by exploiting the exogenous development of other mass media to instrument for the decline in the number of cities with competing newspapers. The results suggest that oligopolies have higher debt ratios than monopolies, controlling for other determinants of leverage. We also study the effect of capital structure on prices. For oligopolies, debt ratios show a significant and positive effect on advertising rates. The effect is not significant for monopolies.