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Anticompetitive Financial Contracting: The Design of Financial Claims

  • Giacinta Cestone
  • Lucy White

    (Harvard Business School and CEPR)

This paper presents the first model where entry deterrence takes place through "financial" rather than "product-market" channels. In existing models, a firm's choice of financial instruments deters entry by affecting product market behavior; here entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms. We find that to deter entry, the claims held on incumbent firms should be sufficiently risky, that is, "equity". This contrasts with the standard Brander and Lewis (1986) result that "debt" deters entry. This effect is more marked the less competitive the credit market is-so "more credit market competition spurs more product market competition". Copyright (c) 2003 by the American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 5 (October)
Pages: 2109-2142

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Handle: RePEc:bla:jfinan:v:58:y:2003:i:5:p:2109-2142
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