We investigate the capital structure of pioneering startup firms, which are frequently credited with opening new markets and niches in the digital era and often face the threat of the potential entry of successful, cash-rich firms from adjacent markets. Our analysis is made in the context of a winner-take-all competition in the form of an all-pay auction for the monopolistic position in a new market. We show that a pioneer's optimal capital structure exhibits widespread diversity and is determined by a tradeoff between entry deterrence and post-entry competition intensification. A pure-equity (a mixture of equity and risky debt) structure is optimal when (1) barriers to entry are small (large), (2) the future prospect of the new market is fairly certain and/or, (3) the new market is likely (unlikely) to create large externalities on the potential entrant's existing business. The post-entry competition is likely to engender large losses to both the winner and the loser.

The paper shows that politically motivated interventions in the financial market in the form of bailing out borrowing firms reduce banks' incentives to gather valuable information about firms' projects. This loss of information is a hidden cost which adversely affects firm value. Firms invest resources and pay a premium to politically connected persons (BOD or other personnel). Such connections serve the twin purposes of hedging and enhancement of the value of collateral pledged against bank loans. Feeling secured, banks lose incentives to monitor borrowing firms. Thus, wealth effect of bailout from political connection is partially offset by the losses of valuable information brought about by bank lending. In equilibrium, the trade-off from gains out of political connections and costs due to losses from information-based bank monitoring depend on (i) the country's disclosure laws, (ii) the political environment, (iii) the premium paid to form connections, and (iv) the state of the economy.

We explore the impact of strategic behaviour of equity holders, debt holders and an opportunistic supplier of a critical input on the firm's capital structure, organisational design, and its outsourcing decision. We show that the supplier can trigger strategic bankruptcy even when the firm is solvent. Equity holders respond to this either by eliminating the supplier and producing the input in-house or by reducing their exposure to debt by using equity-financing. Both responses introduce inefficiency since input costs are higher with in-house production, and debt is cheaper than equity. We show that the equilibrium debt-equity ratio varies positively with cash-flow profitability and the marginal cost of the supplier's input, but negatively with the riskiness of the cash flow and the equity holders' in-house input production costs.