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This paper develops a general framework to analyze the relationship
between a firm's capital structure and its product market strategy and presents
a taxonomy of whether debt makes a firm {\it tough} or {\it soft} in product
market competition and how strategic considerations affect the leverage of a
firm based on the nature of the firm's agency problem and the characteristics of
the product market. We then offer a unified picture of the related literature
and point out some unexplored linkages between capital structure and product
market strategies. Finally, we discuss the empirical implications of our
theoretical results.
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