Anticompetitive Financial Leverage: In Search of a Theory of Harm

The corporate capital structure of firms has come under scrutiny by competition authorities lately, especially with respect to the role of financial investors such as private equity firms. The main concern seems to be that highly indebted firms are not only less resilient, but also, perhaps wilfully, less able to compete. However, a clear theory of anticompetitive harm underpinning competition law enforcement seems to be lacking. This article tries to fill this gap by first reviewing the extant theoretical and empirical literature on how debt affect firms’ strategies and, thus, market outcomes. The general consensus is that a high level of debt induces a weakening of the competitive stance of the borrowing firm, which can be exploited by financially-unconstrained rivals. Therefore, the unilateral adoption of a high level of financial leverage is irrational unless it is reciprocated by rival firms. Ultimately, though, this theory of harm does not provide a robust basis for enforcement – on either and ex-ante basis under merger control, or ex-post basis under competition law – due to the existence of legitimate alternative explanations for the use of financial leverage.