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Mergers and the limited liability effect

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Author Info
M. Pilar Socorro () (Universidad de Las Palmas de Gran Canaria; Facultad de Ciencias Económicas y Empresariales, Departamento de Análisis Económico Aplicado; C/ Saulo Torón 4, 35017 Las Palmas de G.C. Spain Tel.:+34 928 45 9605 - Fax: +34 928 45 8183)
Abstract

This paper analyzes the effects of mergers in a homogenous product market with uncertainty over demand, fixed costs, and limited liability debt financing. On the one hand, given the limited liability e.ect, merging parties compete more aggressively and mergers that were unprofitable in absence of any debt obligation may become beneficial. On the other hand, socially advantageous mergers may be unprofitable for the colluding firms. In these cases, public intervention is needed. One possibility consists on subsidizing such mergers. However, it is proved that the combination of limited liability debt financing and an appropriate antitrust policy leads to higher social welfare than subsidies.

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Paper provided by Facultad de Ciencias Económicas de la ULPGC in its series Documentos de trabajo conjunto ULL-ULPGC with number 2004-11.

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Length: 24 pages
Date of creation: Nov 2004
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Handle: RePEc:can:series:2004-11

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Related research
Keywords: merger; limited liability; debt;

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  1. Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, vol. 26(2), pages 521-37, May. [Downloadable!] (restricted)
  2. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-35, June. [Downloadable!] (restricted)
  3. Kolstad, Charles D & Mathiesen, Lars, 1987. "Necessary and Sufficient Conditions for Uniqueness of a Cournot Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 54(4), pages 681-90, October. [Downloadable!] (restricted)
  4. Brown, Murray & Chiang, Shin-Hwan, 2002. "Unsystematic risk and coalition formation in product markets," International Journal of Industrial Organization, Elsevier, vol. 20(3), pages 313-338, March. [Downloadable!] (restricted)
  5. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May. [Downloadable!] (restricted)
  6. Javier Campos, 2000. "Responsabilidad limitada, estructura financiera y comportamiento de las empresas españolas," Investigaciones Economicas, Fundación SEPI, vol. 24(3), pages 585-610, September. [Downloadable!]
  7. Krishnendu Dastidar, 2003. "Oligopoly and financial structure revisited," Economics Bulletin, Economics Bulletin, vol. 12(3), pages 1-12. [Downloadable!]
  8. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-53, June. [Downloadable!] (restricted)
  9. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April. [Downloadable!] (restricted)
  10. Levy, Haim & Sarnat, Marshall, 1970. "Diversification, Portfolio Analysis and the Uneasy Case for Conglomerate Mergers," Journal of Finance, American Finance Association, vol. 25(4), pages 795-802, September. [Downloadable!] (restricted)
  11. Glazer Jacob, 1994. "The Strategic Effects of Long-Term Debt in Imperfect Competition," Journal of Economic Theory, Elsevier, vol. 62(2), pages 428-443, April. [Downloadable!] (restricted)
  12. Banal - Estanol, Albert & Ottaviani, Marco, 2005. "Mergers with Product Market Risk," CEPR Discussion Papers 4831, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February. [Downloadable!] (restricted)
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