Abstract : We explore network effects in capital structure decision making. The economy is presented as a set of nodes (industries) and edges (trading links between them). First, we propose a simple theoretical setup which allows us to illustrate numerically joint dynamics of optimal capital structure choices with respect to agents' characteristics and the intensity of input-output links.We find that the position of an industry in the network affects its capital structure policy. The more suppliers or customers an industry has or the more connected to other industries it is, the higher its leverage becomes. Our second finding is a positive dependence between partner industries' leverages. It implies that industries with highly levered partners are prone to keep higher leverage. This result supports the theory that leverage is partly used as an instrument to improve an economic agent's bargaining position. The results are confirmed under multiple robustness checks.
JEL Classification: D24; D57; G33; L14
Keywords: capital structure, bankruptcy, product market network, centrality