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Anti-Competitive Financial Contracting: The Design of Financial Claims

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Cestone, Giacinta
White, Lucy

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Abstract

This Paper presents the first model where entry deterrence takes place through financial rather than product-market channels. In standard models of the interaction between product and financial markets, a firm's use of financial instruments deters entry by affecting product market behaviour, whereas in our model entry deterrence occurs by affecting the credit market behaviour of investors towards entrant firms. We find that in order to deter entry, the claims held on incumbent firms should be sufficiently risky, ie equity, in contrast to the standard Brander-Lewis (1986) result that debt deters entry. We show that this effect is more marked, the less competitive is the credit market, implying that more credit market competition spurs more product market competition. The model can be used to shed light on the mode of financing of start-up industries and the policy debate on the separation of banking as to whether banks should be permitted to hold equity in firms.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3182.

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Date of creation: Jan 2002
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Handle: RePEc:cpr:ceprdp:3182

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Keywords: coase problem equity over-funding venture capital

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G30 - Financial Economics - - Corporate Finance and Governance - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luigi Guiso & Tullio Jappelli & Mario Padula & Marco Pagano, 2004. "Financial Market Integration and Economic Growth in the EU," CSEF Working Papers 118, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
    Other versions:
  2. Nicola Cetorelli, 2003. "Life-cycle dynamics in industrial sectors: the role of banking market structure," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 135-148. [Downloadable!]
    Other versions:
  3. Man-Keung Tang, 2007. "Private-Sector Financial Liabilities in Advanced Economies: Is More Better?," IMF Working Papers 07/118, International Monetary Fund. [Downloadable!]
  4. Cestone, Giacinta & Fumagalli, Chiara, 2001. "Internal Capital Markets, Cross-Subsidization and Product Market Competition," CEPR Discussion Papers 2935, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. BIAIS, Bruno & PEROTTI, Enrico, 2005. "Entrepreneurs and New Ideas," IDEI Working Papers 347, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
  6. Giacinta Cestone, 1999. "Corporate Financing and Product Market Competition: An Overview," CSEF Working Papers 18, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  7. Stefan ARPING, 2002. "Cannibalization & Incentives in Venture Financing," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.07, Université de Lausanne, Faculté des HEC, DEEP, revised May 2002. [Downloadable!]
  8. Zsuzsanna Fluck & Kedran Garrison & Stewart C. Myers, 2005. "Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance," NBER Working Papers 11624, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Giacinta Cestone & Chiara Fumagalli, 2003. "Winner-Picking or Cross-Subsidization? The Strategic Impact of Resource Flexibility in Business Groups," CSEF Working Papers 93, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  10. Giovanni Cespa, 2007. "Information Sales and Insider Trading with Long-lived Information," CSEF Working Papers 174, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  11. Sudipto Bhattacharya & Sergei Guriev, 2004. "Patents vs Trade Secrets: Knowledge Licensing and Spillover," Working Papers w0064, Center for Economic and Financial Research (CEFIR), revised Feb 2006. [Downloadable!]
    Other versions:
  12. Stefan ARPING, 2000. "Banking, Commerce, and Antitrust," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 00.22, Université de Lausanne, Faculté des HEC, DEEP, revised May 2002. [Downloadable!]
  13. Nicola Cetorelli, 2004. "Real effects of bank competition," Working Paper Series WP-04-03, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  14. DESSI, Roberta, 2007. "Contractual Enforcement and Strategic Incompleteness," IDEI Working Papers 465, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  15. Schuett, Florian, 2007. "Field-of-use restrictions in licensing agreements," MPRA Paper 8534, University Library of Munich, Germany. [Downloadable!]
  16. Giacinta CESTONE, 2001. "Venture Capital Meets Contract Theory: Risky Claims or Formal Control?," UFAE and IAE Working Papers 480.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
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