IDEAS home Printed from https://ideas.repec.org/p/can/series/2004-11.html
   My bibliography  Save this paper

Mergers and the limited liability effect

Author

Listed:
  • 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.

Suggested Citation

  • M. Pilar Socorro, 2004. "Mergers and the limited liability effect," Documentos de trabajo conjunto ULL-ULPGC 2004-11, Facultad de Ciencias Económicas de la ULPGC.
    • Handle: RePEc:can:series:2004-11
    as

    Download full text from publisher

    File URL: http://www.bibliotecas.ulpgc.es/fcee/hemeroteca/documentos%20de%20trabajo/DocumentosDTrabajo/doc46/dt2004-11.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kim, E Han & McConnell, John J, 1977. "Corporate Mergers and the Co-insurance of Corporate Debt," Journal of Finance, American Finance Association, vol. 32(2), pages 349-365, May.
    2. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-653, June.
    3. Michel Poitevin, 1989. "Financial Signalling and the "Deep-Pocket" Argument," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 26-40, Spring.
    4. Ghosh, Aloke & Jain, Prem C., 2000. "Financial leverage changes associated with corporate mergers," Journal of Corporate Finance, Elsevier, vol. 6(4), pages 377-402, December.
    5. 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.
    6. Poitevin, Michel, 1990. "Strategic financial signalling," International Journal of Industrial Organization, Elsevier, vol. 8(4), pages 499-518, December.
    7. Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, vol. 26(2), pages 521-537, May.
    8. Charles D. Kolstad & Lars Mathiesen, 1987. "Necessary and Sufficient Conditions for Uniqueness of a Cournot Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(4), pages 681-690.
    9. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    10. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(2), pages 185-199.
    11. Javier Campos, 2000. "Responsabilidad limitada, estructura financiera y comportamiento de las empresas españolas," Investigaciones Economicas, Fundación SEPI, vol. 24(3), pages 585-610, September.
    12. repec:ebl:ecbull:v:12:y:2003:i:3:p:1-12 is not listed on IDEAS
    13. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
    14. Krishnendu Dastidar, 2003. "Oligopoly and financial structure revisited," Economics Bulletin, AccessEcon, vol. 12(3), pages 1-12.
    15. Albert Banal‐Estañol & Marco Ottaviani, 2006. "Mergers with Product Market Risk," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 577-608, September.
    16. 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 415-435, June.
    17. 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.
    18. 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.
    19. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Istaitieh, Abdulaziz & Rodriguez-Fernandez, Jose M., 2006. "Factor-product markets and firm's capital structure: A literature review," Review of Financial Economics, Elsevier, vol. 15(1), pages 49-75.
    2. Campos, Javier & Carrasco, Raquel & Requejo, Alejandro, 2003. "Legal form and risk exposure in Spanish firms," MPRA Paper 103405, University Library of Munich, Germany, revised 2002.
    3. Abdulaziz Istaitieh & José M. Rodríguez‐Fernández, 2006. "Factor‐product markets and firm's capital structure: A literature review," Review of Financial Economics, John Wiley & Sons, vol. 15(1), pages 49-75.
    4. Sumit K. Majumdar & Rabih Moussawi & Ulku Yaylacicegi, 2018. "Capital Structure and Mergers: Retrospective Evidence from a Natural Experiment," Journal of Industry, Competition and Trade, Springer, vol. 18(4), pages 449-472, December.
    5. Oechssler, Jorg & Schuhmacher, Frank, 2004. "The limited liability effect in experimental duopoly markets," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 163-184, February.
    6. Povel, Paul & Raith, Michael, 2004. "Financial constraints and product market competition: ex ante vs. ex post incentives," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 917-949, September.
    7. Haan, Marco A. & Toolsema, Linda A., 2008. "The strategic use of debt reconsidered," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 616-624, March.
    8. Guney, Yilmaz & Li, Ling & Fairchild, Richard, 2011. "The relationship between product market competition and capital structure in Chinese listed firms," International Review of Financial Analysis, Elsevier, vol. 20(1), pages 41-51, January.
    9. Martin, Richard, 2003. "Debt financing and entry," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 533-549, April.
    10. Erol, Turan, 2005. "Corporate debt and output pricing in developing countries: Industry-level evidence from Turkey," Journal of Development Economics, Elsevier, vol. 76(2), pages 503-520, April.
    11. T. Franck & N. Huyghebaert, 2004. "On the Interactions between Capital Structure and Product Markets.A Survey of the Literature," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 727-787.
    12. Le Pape, Nicolas, 2001. "Endettement des firmes et comportements de rivalité : l’apport des principaux modèles en économie industrielle," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(2), pages 281-302, juin.
    13. Spagnolo, Giancarlo, 1998. "Debt as a (Credible) Collusive Device, or: "Everybody Happy but the Consumer"," SSE/EFI Working Paper Series in Economics and Finance 243, Stockholm School of Economics, revised 01 Aug 2004.
    14. Fraja, Gianni De & Piga, Claudio A. G., 2004. "Strategic debt in vertical relationships: theory and evidence," Research in Economics, Elsevier, vol. 58(2), pages 103-123, June.
    15. de Jong, A. & Nguyen, T.T. & van Dijk, M.A., 2007. "Strategic Debt: Evidence from Bertrand and Cournot Competition," ERIM Report Series Research in Management ERS-2007-057-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    16. Bernard Franck & Nicolas Le Pape, 2020. "The limited liability effect: Implications for anticompetitive horizontal mergers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 2082-2102, December.
    17. Helder Valente, 2003. "Financial Strategies in Mergers and Acquisitions (M&A): The Case of Regulated Firms," CEF.UP Working Papers 0307, Universidade do Porto, Faculdade de Economia do Porto.
    18. Neff, Cornelia, 1997. "Finanzstruktur und strategischer Wettbewerb auf Gütermärkten," Tübinger Diskussionsbeiträge 89, University of Tübingen, School of Business and Economics.
    19. Grupp, Marcel & Rauch, Christian & Umber, Marc P. & Walz, Uwe, 2015. "The influence of leveraged buyouts on target firms' competitors," SAFE Working Paper Series 99, Leibniz Institute for Financial Research SAFE.
    20. Engelbert J. Dockner & Helmut Elsinger & Andrea Gaunersdorfer, 2018. "The Strategic Role of Dividends and Debt in Markets with Imperfect Competition," Dynamic Games and Applications, Springer, vol. 8(3), pages 601-619, September.

    More about this item

    Keywords

    merger; limited liability; debt;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:can:series:2004-11. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Patricia Santana (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.