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Financial and Industrial Structure with Agency

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  • Williams, Joseph T
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    Abstract

    A sub game perfect Nash equilibrium is characterized for an industry with dissipative costs of agency. In sequence, firms can enter the industry, raise capital with external debt and/or equity, invest in a capital-intensive technology or dissipate capital in perquisites, and finally produce output. For plausible values of two critical parameters, some, firms forego in equilibrium investments with positive net present values. Although more managers would like their firms to invest in the capital-intensive technology, they cannot raise the required cash in the capital market. In equilibrium, the industry can have both a profitable core of large, secure, capital intensive firms, with some debt but no unique optimal capital structure, and a competitive fringe of small, risky, labor-intensive firms. Even as the cost of entry converges to zero, capital-intensive firms can earn extraordinary profits, while all labor-intensive firms fail. With costly agency, access to capital can become a barrier to entry. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal Review of Financial Studies.

    Volume (Year): 8 (1995)
    Issue (Month): 2 ()
    Pages: 431-74

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    Handle: RePEc:oup:rfinst:v:8:y:1995:i:2:p:431-74

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    Cited by:
    1. Rosellon Cifuentes, M.A., 1999. "Liquidation Values, Risk and Capital Structure," Discussion Paper 1999-32, Tilburg University, Center for Economic Research.
    2. Jianjun Miao, 2011. "Optimal Capital Structure and Industry Dynamics," CEMA Working Papers 440, China Economics and Management Academy, Central University of Finance and Economics.
    3. Mine Ertugrul & Erasmo Giambona, 2011. "Property Segment and REIT Capital Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 43(4), pages 505-526, November.
    4. Campello, Murillo, 2003. "Capital structure and product markets interactions: evidence from business cycles," Journal of Financial Economics, Elsevier, vol. 68(3), pages 353-378, June.
    5. Antonczyk, Ron Christian & Salzmann, Astrid Juliane, 2014. "Overconfidence and optimism: The effect of national culture on capital structure," Research in International Business and Finance, Elsevier, vol. 31(C), pages 132-151.
    6. Murillo Campello & Erasmo Giambona, 2011. "Capital Structure and the Redeployability of Tangible Assets," Tinbergen Institute Discussion Papers 11-091/2/DSF24, Tinbergen Institute.
    7. Michael H. Riordan, 2003. "How Do Capital Markets Influence Product Market Competition?," Review of Industrial Organization, Springer, vol. 23(3_4), pages 179-191, December.
    8. Lily Qiu & Gerard Hoberg, 2005. "Future Industrial Organization and Stock Returns versus the Decision to Issue IPOs," Working Papers 2005-06, Brown University, Department of Economics.
    9. Leach, J. Chris & Moyen, Nathalie & Yang, Jing, 2004. "On the Strategic Use of Debt and Capacity in Imperfectly Competitive Product Markets," SIFR Research Report Series 33, Institute for Financial Research.
    10. HernĂ¡n Ortiz-Molina & Gordon M. Phillips, 2010. "Asset Liquidity and the Cost of Capital," NBER Working Papers 15992, National Bureau of Economic Research, Inc.

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