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Mergers and the limited liability effect

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  • 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)

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    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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    File URL: http://www.bibliotecas.ulpgc.es/fcee/hemeroteca/documentos%20de%20trabajo/DocumentosDTrabajo/doc46/dt2004-11.pdf
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    Bibliographic Info

    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
    Date of revision:
    Handle: RePEc:can:series:2004-11

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    Related research

    Keywords: merger; limited liability; debt;

    This paper has been announced in the following NEP Reports:

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    1. 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.
    2. repec:ebl:ecbull:v:12:y:2003:i:3:p:1-12 is not listed on IDEAS
    3. Kolstad, Charles D & Mathiesen, Lars, 1987. "Necessary and Sufficient Conditions for Uniqueness of a Cournot Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 681-90, October.
    4. 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.
    5. Javier Campos, 2000. "Responsabilidad limitada, estructura financiera y comportamiento de las empresas españolas," Investigaciones Economicas, Fundación SEPI, vol. 24(3), pages 585-610, September.
    6. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
    7. 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.
    8. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-53, June.
    9. Albert Banal-Estañol & Marco Ottaviani, 2006. "Mergers with Product Market Risk," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 577-608, 09.
    10. 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.
    11. Krishnendu Dastidar, 2003. "Oligopoly and financial structure revisited," Economics Bulletin, AccessEcon, vol. 12(3), pages 1-12.
    12. 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.
    13. Poitevin, M., 1987. "Strategic Financial Signalling," Cahiers de recherche 8755, Universite de Montreal, Departement de sciences economiques.
    14. 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.
    15. 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.
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