The strategic use of debt reconsidered

Haan, Marco; Toolsema-Veldman, Linda

doi:10.1016/j.ijindorg.2006.05.010

Cited by 14 publications

(16 citation statements)

References 12 publications

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“…This example provides an additional insight on the relationship between uncertainty and the financial structure: the optimal debt decreases with the variance of the shock because greater uncertainty strengthens the debt commitment on the equity holders. This result confirms the negative relation between volatility and debt leverage found by Franck and Le Pape (2008) and Haan and Toolsema (2008) in a duopoly setting (correcting a mistake by Wanzenried 2003).…”

Section: Discussionsupporting

confidence: 83%

Endogenous market structures and the optimal financial structure

Etro

2010

Canadian J of Economics

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We characterize the optimal financial structure as a strategic device to optimize the value of a firm competing in a market where entry is endogenous. Debt financing is always optimal under quantity competition, and, contrary to the Brander-Lewis-Showalter results based on duopolies, we show the optimality of moderate debt financing also under price competition with cost uncertainty (but not with demand uncertainty). We derive the formulas for the optimal financial structure, which does not affect the strategies of the other firms but reduces their number. JEL classification: G31, G32, L11Structures de marché endogènes et structure financière optimale. On caractérise la structure financière optimale comme un dispositif stratégique pour optimiser la valeur d'une entreprise concurrençant dans un marché où l'entrée est endogène. Le financement de la dette est toujours optimal dans un régime de concurrence par les quantités, et, contrairement aux résultats de Brander-Lewis-Showalter pour les duopoles, on montre qu'il y a optimalité aussi du financement d'une dette modérée dans un régime de concurrence par les prix quand il y incertitude des coûts (mais pas incertitude de la demande). On dérive les formules pour la structure financière optimale, qui n'affecte pas les stratégies des autres entreprises mais réduit leur nombre.

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Section: Discussionsupporting

confidence: 83%

Endogenous market structures and the optimal financial structure

Etro

2010

Canadian J of Economics

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“…She does not take uncertainty on the cost side into account. Haan and Toolsema (2007) present a numerical analysis of strategic debt using Wanzenried's (2003) two-stage differentiated goods model with a correction in solving the second stage of the model. In contrast to the result of Wanzenried, they find that the equilibrium debt level decreases for both Bertrand and Cournot firms as demand becomes more volatile.…”

Section: Literaturementioning

confidence: 99%

Strategic Debt: Evidence from Bertrand and Cournot Competition

2007

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We investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm's leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms' competitive behavior in the product market in their capital structure decisions.

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“…The model takes into account the fact that the bankruptcy risk (θ i ) is strategically used to gain advantage in the product market. Consequently, our approach contrasts with the standard literature on debt/product market interaction, since models in the vein of Brander and Lewis (1986) only recognize debt obligation, but not risk exposure, as a strategic device (see for instance Franck & Le Pape, 2008;Haan & Tooselma, 2008, or Showalter, 2010.…”

Section: Bankruptcy Risk Valuation and Debt/product Market Strategiesmentioning

confidence: 99%

The limited liability effect: Implications for anticompetitive horizontal mergers

Franck

Pape

2020

J Public Economic Theory

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We consider an industry including both leveraged and unleveraged firms engaged in a sequential decision-making process. At the first stage a firm and its bank, considering the production cost uncertainty and the probability distribution of the random shock, evaluate a bankruptcy risk; at the second stage firms engage in Cournot competition. By introducing an additional upstream stage we examine how incentives to merge with competitors are altered when shareholders of leveraged firms are protected by the limited liability. We demonstrate that a merger increases the probability of bankruptcy for the merged firm if the merger involves only leveraged firms, but this probability decreases if the merger involves at least one unleveraged firm. The welfare loss associated with anticompetitive effects of mergers is lower when the coalition gathers unleveraged firms rather than leveraged ones. Consequently, we argue that in evaluating proposed mergers Competition Authorities should take into account the financial structure of both merging firms and outsiders.

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The strategic use of debt reconsidered

Cited by 14 publications

References 12 publications

Endogenous market structures and the optimal financial structure

Endogenous market structures and the optimal financial structure

Strategic Debt: Evidence from Bertrand and Cournot Competition

The limited liability effect: Implications for anticompetitive horizontal mergers

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