Capital Structure in an Industry Equilibrium with Endogenous Liquidation Values *

Abstract

This paper investigates the interaction between financial structure, liquidation values and product market equilibrium. Liquidation values depend on how many firms are liquidated, and therefore on the industry equilibrium of capital structures and of technology choices. We show that firms using a technology with high liquidation value issue less debt than those with low liquidation value even if these ones may be inefficiently liquidated. With respect to the equilibrium in the industry, we obtain that even if in equilibrium all firms use the same technology, firms will use widely different capital structures.