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The strategic use of debt reconsidered

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Author Info

  • Haan, M.A.
  • Toolsema, L.A.

    (Groningen University)

Abstract

Wanzenried (2003, International Journal of Industrial Organization 21(2), 171-200) considers a two-stage differentiated goods duopoly model with demand uncertainty linking firms? capital structure choice to their output market decisions. Unfortunately, her analysis is flawed. We correct for this, and solve the model umerically to find some results that are qualitatively different from hers. First, in equilibrium, the use of debt always yields lower firm profits, i.e. even in the case of complements. Second, the equilibrium debt level decreases as demand becomes more volatile. We also discuss some problems with the debt contract commonly used in the strategic debt literature.

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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 03E37.

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Date of creation: 2003
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Handle: RePEc:dgr:rugsom:03e37

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References

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  1. John S. Hughes & Jennifer L. Kao & Arijit Mukherji, 1998. "Oligopoly, Financial Structure, and Resolution of Uncertainty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 67-88, 03.
  2. Kovenock, D. & Phillips, G.M., 1995. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," UFAE and IAE Working Papers 313.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. Haan, M.A. & Toolsema, L.A., 2006. "License auctions when winning bids are financed through debt," Research Report 06F06, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  4. Jörg Oechssler & Frank Schuhmacher, 2001. "The Limited Liability Effect in Experimental Duopoly Markets," Bonn Econ Discussion Papers bgse36_2001, University of Bonn, Germany.
  5. 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.
  6. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
  7. Opler, Tim C & Titman, Sheridan, 1994. " Financial Distress and Corporate Performance," Journal of Finance, American Finance Association, vol. 49(3), pages 1015-40, July.
  8. Jensen, Richard & Showalter, Dean, 2004. "Strategic debt and patent races," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 887-915, September.
  9. Michel Poitevin, 1989. "Collusion and the Banking Structure of a Duopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 263-77, May.
  10. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-53, June.
  11. 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.
  12. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
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Cited by:
  1. Abe de Jong & Thuy Thu Nguyen & Mathijs A. van Dijk, 2008. "Strategic Debt: Evidence from Bertrand and Cournot Competition," Working Papers 11, Development and Policies Research Center (DEPOCEN), Vietnam.
  2. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.

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