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Project Bundling, Liquidity Spillovers, and Capital Market Discipline

  • Holger M. Mueller

    (University of Mannheim)

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    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.

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    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0681.

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    Date of creation: 01 Aug 2000
    Date of revision:
    Handle: RePEc:ecm:wc2000:0681
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    9. 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.
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    17. 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.
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