Inside versus Outside Financing and Product Market Competition
AbstractThis 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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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2049.
Date of creation: Dec 1998
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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; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- 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
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- Marcel Boyer & Armel Jacques & Michel Moreaux, 2001. "Bankruptcy Cost, Financial Structure and Technological Flexibility Choices," CIRANO Working Papers 2001s-27, CIRANO.
- Wanzenried, Gabrielle, 2003. "Capital structure decisions and output market competition under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 171-200, February.
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