Strategic Financing and Information Revelation Amid Market Competition

Problem definition: Interest rates on loans are often influenced by market prospects. Under asymmetric information, firms may attempt to signal strong prospects to lenders by over-borrowing. However, publicly revealing confidence in the market can also intensify competition. Motivated by these observations, we examine a firm’s financing and information disclosure strategy. Methodology/results: We develop a game-theoretical model where a firm with private information about the market prospect competes in quantity against a representative competitor. The firm has a limited amount of internal capital and must borrow from lenders to finance production. We show that when borrowing information is publicly accessible, the firm’s strategy depends on its capital needs and the level of competition. If capital needs are high and competition is low, the firm over-finances under strong market prospects to secure a lower interest rate. Conversely, if capital needs are low and competition is high, the firm under-finances under weak market prospects to reduce competitive pressure. Interestingly, in other scenarios, these opposing incentives neutralize each other, leading to a first-best outcome. We further explore private financing, where borrowing information remains undisclosed, forcing the competitor to rely on prior market information. We find that public financing generally dominates private financing under intense competition, but it can also be advantageous when competition is low and capital needs are high. Managerial implications: Our findings suggest that, under information asymmetry and competition, external borrowing can sometimes be beneficial by creating a counterbalancing force, and a slight increase in competition is not always detrimental when financing needs exist.

History: This paper was selected as part of the 1RR initiative between the M&SOM Journal and the MSOM Society. This paper was part of the 2024 MSOM Service Operations SIG Conference.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2025.0243.