Price-fixing cartels are pervasive. However, antitrust enforcement around the world has been recently picking up speed. Higher fines and new tools such as leniency programs for cartel whistleblowers have led to unprecedented antitrust enforcement actions against the collusion and led to crumbling cartels. Theoretically, the breakdown of collusive activities that involve higher prices and restricted output is likely to result in the expansion of production as well as technological change. Hence, when the nature of equilibrium in the product market switches from collusion to oligopolistic competition, firms increase asset growth. In this paper we ask how these firms finance this asset growth – debt or equity – and thus what implications anticollusion enforcement has on firms’ capital structure.

In our study, we look at a particular regulatory change – leniency laws – that increased the costs of forming the collusive arrangements. These leniency programs offer firms within a cartel either total immunity or a reduction in the fines if they self-report and hand over evidence to antitrust authorities. We collect data on their passage in 63 countries and territories over 1990-2012. We notice that these laws were passed at different times which allows us to compare firms affected by leniency legislation with similar firms situated in countries without such a law and derive causal evidence of how stronger antitrust enforcement affects firms’ financing choices.

Our main findings suggest that following the adoption of leniency law, firms expand and fund such expansion by issuing more equity. There is also a much more modest increase in debt issuance activities and a general decline in leverage. Such financing choices seem to reflect the use of financing that we document: the asset growth comes from higher cash holdings, capital expenditures, and investment in intangible assets, that are more conducive to equity financing.

The effects we identify are not uniform. We find that our results are significantly stronger for firms with higher predicted probability of being part of a cartel, and also those industries in which collusion is expected to be stable according to the predictions from theory: e.g., for firms in the more concentrated industries, firms in the industries that use less patent protection, and firms in low-growth industries.

We reconfirm this evidence by studying how firms are affected by the passage of leniency laws in countries that are major export destinations of the concerned firm’s industry and in countries where the subject firm’s subsidiaries are located, and also the enactment of Antitrust Criminal Penalty Enhancement and Reform Act (ACPERA) in the United States in 2004, which further increased the fines and provided more incentives for leniency law applicants. We consistently find that affected firms increase asset growth and equity issuance.

Taken together, our results suggest that after collusive strategies become more costly firms start expanding by issuing equity which gives more financial flexibility. That is expected from the strategic interactions: Given that all former cartel members are expected to expand investment in production capacity and increase output, financing the expansion with debt would make firms vulnerable if rival firms choose to expand aggressively.