Project Bundling, Liquidity Spillovers, and Capital Market Discipline
This paper develops a theory of integration based on the inability of parties to write comprehensive financial contracts. In our model, integration comes with both benefits and costs. On the one hand, integration entails liquidity spillovers from high- to low-return projects, implying that integrated firms have better access to external finance than non-integrated firms. On the other hand, integration leads to the creation of a larger internal capital market, thereby making integrated firms less dependent on the provision of follow-up financing by outside investors. But in a world where financial contracting is incomplete, the threat not to provide follow-up financing may be the only means that investors have to make borrowers repay their debt. By making this threat less effective, integration may aggravate existing financing constraints caused by contractual incompleteness.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
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.:
- Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994.
"Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test,"
The Quarterly Journal of Economics,
MIT Press, vol. 109(2), pages 491-515, May.
- Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
- Lewellen, Wilbur G, 1971. "A Pure Financial Rationale for the Conglomerate Merger," Journal of Finance, American Finance Association, vol. 26(2), pages 521-37, May.
- Jeremy C. Stein, 1995.
"Internal Capital Markets and the Competition for Corporate Resources,"
NBER Working Papers
5101, National Bureau of Economic Research, Inc.
- Stein, Jeremy C, 1997. " Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-33, March.
- Mehta, Shailendra Raj, 1993. "A solution to a class of agency problems, with application to the question of limited liability," Economics Letters, Elsevier, vol. 43(2), pages 193-197.
- Lamont, Owen, 1997.
" Cash Flow and Investment: Evidence from Internal Capital Markets,"
Journal of Finance,
American Finance Association, vol. 52(1), pages 83-109, March.
- Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
- Besley, T. & Coate, S., 1991.
"Group Lending, Repayment Incentives And Social Collateral,"
152, Princeton, Woodrow Wilson School - Development Studies.
- Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
- Fluck, Zsuzsanna & Lynch, Anthony W, 1999. "Why Do Firms Merge and Then Divest? A Theory of Financial Synergy," The Journal of Business, University of Chicago Press, vol. 72(3), pages 319-46, July.
- 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.
- Robert H. Gertner & David S. Scharfstein & Jeremy C. Stein, 1994.
"Internal versus External Capital Markets,"
NBER Working Papers
4776, National Bureau of Economic Research, Inc.
- Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
- Johnson, Scott & Pratt, John W & Zeckhauser, Richard J, 1990. "Efficiency Despite Mutually Payoff-Relevant Private Information: The Finite Case," Econometrica, Econometric Society, vol. 58(4), pages 873-900, July.
- Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
- Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
- Hyun-Han Shin & René M. Stulz, 1998. "Are Internal Capital Markets Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 531-552, May.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
- Müller, Holger M. & Inderst, Roman, 1999. "Project Bundling, Liquidity Spillovers, and Capital Market Discipline," Sonderforschungsbereich 504 Publications 99-89, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
- Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
- Saman Majd & Stewart C. Myers, 1985. "Valuing the Government's Tax Claim on Risky Corporate Assets," NBER Working Papers 1553, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:0681. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.