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On the Relationship Between Financial Status and Investment in Technological Flexibility


  • Marcel Boyer
  • Armel Jacques
  • Michel Moreaux


We study the interactions between equity financing and strategic technological flexibility choices of firms facing a threat of costly bankruptcy. We show that a firm's level of financial hardship is an important determinant of the level and type of investment it chooses to make, either a less costly inflexible technology or a more expansive flexible technology. We show that the level of financial hardship has a non-monotonic effect : as the level of equity financing increases, the choice of technology may change and the level of investment may first increase and then decrease or vice-versa, depending on the differential investment cost, the bankruptcy cost, and whether or not the less costly technology is the best reply for an all equity (no debt) firm. The level of external financing (debt) may be used strategically as a non-cooperative collusion way to increase the expected profits of both firms. A firm may also use debt as a commitment device to increase its own expected profit. Nous étudions les interactions entre le financement par actions et les choix de flexibilité technologique des entreprises menacées de faillites coûteuses. Nous montrons que le niveau de crise financière traversée par l'entreprise est un déterminant important dans le choix du niveau et du type d'investissement qu'elle va faire, soit une technologie inflexible moins coûteuse, soit une technologie flexible plus coûteuse. Nous montrons que le niveau de difficulté financière a un effet non monotone : au fur et à mesure que le niveau de financement par actions augmente, le choix technologique peut se modifier et le niveau d'investissement peut tout d'abord augmenter pour diminuer ensuite, ou vice versa, dépendant du différentiel du coût d'investissement, du coût de faillite, et selon que la technologie plus ou moins coûteuse est ou non la meilleure solution pour une entreprise sans dette. Le niveau de financement extérieur (endettement) peut être utilisé stratégiquement comme moyen de collusion non coopérative pour accroître les profits attendus des deux entreprises. Une entreprise peut également utiliser l'endettement comme un outil d'engagement pour accroître son propre profit attendu.

Suggested Citation

  • Marcel Boyer & Armel Jacques & Michel Moreaux, 2002. "On the Relationship Between Financial Status and Investment in Technological Flexibility," CIRANO Working Papers 2002s-14, CIRANO.
  • Handle: RePEc:cir:cirwor:2002s-14

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    References listed on IDEAS

    1. Boyer, M. & Jacques, A. & Moreaux, M., 1998. "Observability, Commitment and Flexibility," Papers 98.504, Toulouse - GREMAQ.
    2. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    3. Ellingsen, Tore, 1995. "On flexibility in oligopoly," Economics Letters, Elsevier, vol. 48(1), pages 83-89, April.
    4. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, January.
    5. Dasgupta, Sudipto & Shin, Jhinyoung, 1999. "Information sharing, information free-riding and capital structure in oligopolies," International Journal of Industrial Organization, Elsevier, vol. 17(1), pages 109-135, January.
    6. Vives, Xavier, 1989. "Technological competition, uncertainty, and oligopoly," Journal of Economic Theory, Elsevier, vol. 48(2), pages 386-415, August.
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    More about this item


    Internal financing; Debt; Technological flexibility; Strategic behavior; Financement interne; Endettement; Flexibilité technologique; Comportement stratégique;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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