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Capital Structure with Opportunistic Stakeholders' Coalitions

Author

Listed:
  • Elie Appelbaum

    (Department of Economics, York University, Toronto, Canada)

  • Sanjay Banerji

    (Finance Group, Essex Business School, University of Essex, Colchester, United Kingdom)

Abstract

This paper shows that stakeholders' multilateral opportunistic behaviour during financial distress may lead to premature liquidation of the firm. Consequently, the firm will use its capital structure to mitigate the costs of such opportunism. Specifically, the firm will reduce its debt so that the probability of multilateral opportunism is zero; namely, it will use only safe debt. The paper predicts that the debt-equity ratio will decrease with risk, the number of contracts, the difficulty in writing them and in achieving franchising arrangements, the supplier's importance in opportunistic coalitions and a decrease in the firm's size, or the supplier's adjustment costs.

Suggested Citation

  • Elie Appelbaum & Sanjay Banerji, 2010. "Capital Structure with Opportunistic Stakeholders' Coalitions," Working Papers 2010_2, York University, Department of Economics.
    • Handle: RePEc:yca:wpaper:2010_2
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    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/2010/Capital_Structure.pdf
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    More about this item

    Keywords

    Incomplete Contracts; Opportunistic Behaviour; Bankruptcy; Capital Structure.;
    All these keywords.

    JEL classification:

    • D0 - Microeconomics - - General
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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