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Inside versus Outside Financing and Product Market Competition

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Author Info
Schnitzer, Monika
Wambach, Achim

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Abstract

This paper investigates the interaction of firms' financial structure and their competitive behaviour on oligopolistic product markets. We consider risk-averse entrepreneurs who produce with uncertain production costs. To reduce their exposure to risk they can sell stocks to risk-neutral outside-investors. We show that in equilibrium the entrepreneurs prefer not to fully transfer this risk to outside-financiers because it reduces the competitive pressure on the product market. Furthermore, we discuss how the optimal financial structure reacts to variations in entrepreneurs' risk aversion, the level of cost uncertainty and the number of competitors.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2049.

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Date of creation: Dec 1998
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Handle: RePEc:cpr:ceprdp:2049

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Related research
Keywords: Bertrand Competition Corporate Finance impact of financial Structure on competition impact of product competition on financial structure inside versus outside financing

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

Cited by:
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  1. Marcel Boyer & Armel Jacques & Michel Moreaux, 2001. "Bankruptcy Cost, Financial Structure and Technological Flexibility Choices," CIRANO Working Papers 2001s-27, CIRANO. [Downloadable!]
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