Strategic Debt with Diverse Maturity in Developing Countries: Industry-Level Evidence from Turkey

A joint hypothesis of the strategic debt theory is that leverage decisions are the extensions of output market strategies and that debt, in return, has consequences for industry competition. It is, however, highly controversial as to how these consequences depend on the maturity structure; the role of maturity has not been directly tested. We test this joint hypothesis of strategic debt separately for short-term and long-term debt in Turkish manufacturing. A distinction according to maturity is critical, because corporate debt in advanced countries is predominantly long term, while it is predominantly short term in developing countries, including Turkey. The panel estimations at the two-digit industry level point to significant behavioral differences attributable to the maturity structure. The use of short-term debt is found to characterize price (Bertrand) competition, whereas the use of long-term debt is found to characterize quantity (Cournot) competition. These findings raise the maturity structure as a critical element in the strategic debt theory as has it long been so in general finance theory.