Feedback and Contagion through Distressed Competition

作者：Hui Chen, Winston Wei Dou, Hongye Guo, Ji Yan · 发表于：National Bureau of Economic Research · 年份：2023 · DOI：10.3386/w30841 · 被引用次数：44 · 研究领域：Corporate Finance and Governance、Economic theories and models、Economic Policies and Impacts

Firms tend to compete more aggressively in financial distress; the intensified competition in turn reduces profit margins, pushing themselves further into distress and adversely affecting other firms. To study such feedback and contagion effects, we incorporate strategic competition into a dynamic model with long-term defaultable debt, which generates various peer interactions like predation and self-defense. The feedback effect imposes an additional source of financial distress costs incurred for raising leverage, which helps explain the negative profitability-leverage relation across industries. Owing to the contagion effect, in a decentralized equilibrium, leverage is excessively high from an industry perspective, compromising industry's financial stability.