IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/52873.html
   My bibliography  Save this paper

Predation Due to Bargaining Power Difference in Financial Contracting

Author

Listed:
  • Chan, Kwok Ho
  • Lu, Zhou
  • Fung, Ka Wai Terence

Abstract

Previous literature presented a predation model based on agency problems in financial contracting. In that model, predation reduced prey’s cash flow through breaking the relationship between the prey and its investors as the prey is financially constrained. This paper presents a different model in which both the predator and the prey are financially constrained and in need of external funding. The only dissimilarity between the predator and the prey is their corresponding level of bargaining power in financial contracting over their respective investors. The asymmetry of bargaining power is the unique source of predatory behavior. Financial contract between firm with less bargaining power (prey) and its investor can deter predation if the predator cannot renegotiate the contract with its own investor. If renegotiation is available for the predator, no financial contract can successfully deter predation.

Suggested Citation

  • Chan, Kwok Ho & Lu, Zhou & Fung, Ka Wai Terence, 2013. "Predation Due to Bargaining Power Difference in Financial Contracting," MPRA Paper 52873, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:52873
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/52873/1/MPRA_paper_52873.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Michel Poitevin, 1989. "Financial Signalling and the "Deep-Pocket" Argument," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 26-40, Spring.
    2. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    3. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    4. Jean-Pierre Benoit, 1984. "Financially Constrained Entry in a Game with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 490-499, Winter.
    5. Drew Fudenberg & Jean Tirole, 1986. "A "Signal-Jamming" Theory of Predation," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 366-376, Autumn.
    6. Fernandez-Ruiz, Jorge, 2004. "Predation due to adverse selection in financial markets," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 715-733, May.
    7. Snyder, Christopher M, 1996. "Negotiation and Renegotiation of Optimal Financial Contracts under the Threat of Predation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 325-343, September.
    8. Drew Fudenberg & Jean Tirole, 1985. "Predation Without Reputation," Working papers 377, Massachusetts Institute of Technology (MIT), Department of Economics.
    9. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 647-663.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arping, Stefan & Diaw, Khaled M., 2008. "Sunk costs, entry deterrence, and financial constraints," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 490-501, March.
    2. Marquez, Robert, 2010. "Informed lending as a deterrent to predation," Finance Research Letters, Elsevier, vol. 7(4), pages 193-201, December.
    3. Dang, Viet Anh, 2010. "Optimal financial contracts with hidden effort, unobservable profits and endogenous costs of effort," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 75-89, February.
    4. T. Franck & N. Huyghebaert, 2004. "On the Interactions between Capital Structure and Product Markets.A Survey of the Literature," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 727-787.
    5. Rosellon Cifuentes, M.A., 1999. "Essays on financial policy, liquidation values and product markets," Other publications TiSEM 802f644e-3e93-4815-bf33-8, Tilburg University, School of Economics and Management.
    6. 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 Naples, Italy.
    7. Janvier D. Nkurunziza, 2005. "Reputation and Credit without Collateral in Africa`s Formal Banking," Economics Series Working Papers WPS/2005-02, University of Oxford, Department of Economics.
    8. Poitevin, Michel, 1989. "Information et marchés financiers : une revue de littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 65(4), pages 555-589, décembre.
    9. Jeanne, Olivier, 2003. "Why Do Emerging Economies Borrow in Foreign Currency?," CEPR Discussion Papers 4030, C.E.P.R. Discussion Papers.
    10. Antoine Faure- Grimaud & Roman Inderst, 2005. "Conglomerate Entrenchment under Optimal Financial Contracting," American Economic Review, American Economic Association, vol. 95(3), pages 850-861, June.
    11. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 281-315.
    12. Grenadier, Steven R. & Wang, Neng, 2005. "Investment timing, agency, and information," Journal of Financial Economics, Elsevier, vol. 75(3), pages 493-533, March.
    13. Christian At & Lionel Thomas, 2015. "Optimal Lending Contracts under both Adverse Selection and Moral Hazard," Post-Print halshs-01308331, HAL.
    14. Fiona Scott Morton, 1996. "Entry and Predation: British Shipping Cartels 1879-1929," NBER Working Papers 5663, National Bureau of Economic Research, Inc.
    15. Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(1), pages 1-39, March.
    16. Liu, Wei & Spanjers, Willem, 2005. "Social capital and credit constraints in informal finance," Economics Discussion Papers 2005-5, School of Economics, Kingston University London.
    17. Spagnolo, Giancarlo, 1998. "Debt as a (Credible) Collusive Device, or: "Everybody Happy but the Consumer"," SSE/EFI Working Paper Series in Economics and Finance 243, Stockholm School of Economics, revised 01 Aug 2004.
    18. Albert Banal-Estañol & Marco Ottaviani & Andrew Winton, 2013. "The Flip Side of Financial Synergies: Coinsurance Versus Risk Contamination," The Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 3142-3181.
    19. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    20. Leach, J. Chris & Moyen, Nathalie & Yang, Jing, 2013. "On the strategic use of debt and capacity in rapidly expanding markets," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 332-344.

    More about this item

    Keywords

    Predation; Long-purse; Signal-jamming; Financial Contracts; Bargaining Power;
    All these keywords.

    JEL classification:

    • D87 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Neuroeconomics
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:52873. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.