The commitment value of the debt: A reappraisal

Franck, Bernard; Pape, Nicolas Le

doi:10.1016/j.ijindorg.2006.05.009

Cited by 9 publications

(13 citation statements)

References 12 publications

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“…This example provides an additional insight on the relationship between uncertainty and the financial structure: the optimal debt decreases with the variance of the shock because greater uncertainty strengthens the debt commitment on the equity holders. This result confirms the negative relation between volatility and debt leverage found by Franck and Le Pape (2008) and Haan and Toolsema (2008) in a duopoly setting (correcting a mistake by Wanzenried 2003).…”

Section: Discussionsupporting

confidence: 83%

“…1 1 See also the theoretical contributions by Maksimovic (1990), Dasgupta and Titman (1998), Wanzenried (2003), Lyandres (2006), and Franck and Le Pape (2008) for static duopolistic models and Miao (2005) and Khanna and Schroder (2009) for dynamic models with entry. For models on the relation between financial structure and entry deterrence in the product market see Brander and Lewis (1988), Bolton and Scharfstein (1990), and Showalter (1999).…”

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confidence: 99%

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Endogenous market structures and the optimal financial structure

Etro

2010

Canadian J of Economics

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We characterize the optimal financial structure as a strategic device to optimize the value of a firm competing in a market where entry is endogenous. Debt financing is always optimal under quantity competition, and, contrary to the Brander-Lewis-Showalter results based on duopolies, we show the optimality of moderate debt financing also under price competition with cost uncertainty (but not with demand uncertainty). We derive the formulas for the optimal financial structure, which does not affect the strategies of the other firms but reduces their number. JEL classification: G31, G32, L11Structures de marché endogènes et structure financière optimale. On caractérise la structure financière optimale comme un dispositif stratégique pour optimiser la valeur d'une entreprise concurrençant dans un marché où l'entrée est endogène. Le financement de la dette est toujours optimal dans un régime de concurrence par les quantités, et, contrairement aux résultats de Brander-Lewis-Showalter pour les duopoles, on montre qu'il y a optimalité aussi du financement d'une dette modérée dans un régime de concurrence par les prix quand il y incertitude des coûts (mais pas incertitude de la demande). On dérive les formules pour la structure financière optimale, qui n'affecte pas les stratégies des autres entreprises mais réduit leur nombre.

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Section: Discussionsupporting

confidence: 83%

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confidence: 99%

Endogenous market structures and the optimal financial structure

Etro

2010

Canadian J of Economics

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“…The model takes into account the fact that the bankruptcy risk (θ i ) is strategically used to gain advantage in the product market. Consequently, our approach contrasts with the standard literature on debt/product market interaction, since models in the vein of Brander and Lewis (1986) only recognize debt obligation, but not risk exposure, as a strategic device (see for instance Franck & Le Pape, 2008;Haan & Tooselma, 2008, or Showalter, 2010.…”

Section: Bankruptcy Risk Valuation and Debt/product Market Strategiesmentioning

confidence: 99%

The limited liability effect: Implications for anticompetitive horizontal mergers

Franck

Pape

2020

J Public Economic Theory

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We consider an industry including both leveraged and unleveraged firms engaged in a sequential decision-making process. At the first stage a firm and its bank, considering the production cost uncertainty and the probability distribution of the random shock, evaluate a bankruptcy risk; at the second stage firms engage in Cournot competition. By introducing an additional upstream stage we examine how incentives to merge with competitors are altered when shareholders of leveraged firms are protected by the limited liability. We demonstrate that a merger increases the probability of bankruptcy for the merged firm if the merger involves only leveraged firms, but this probability decreases if the merger involves at least one unleveraged firm. The welfare loss associated with anticompetitive effects of mergers is lower when the coalition gathers unleveraged firms rather than leveraged ones. Consequently, we argue that in evaluating proposed mergers Competition Authorities should take into account the financial structure of both merging firms and outsiders.

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“…Thus, it is not reasonable to assume that a firm having negative profits would be protected by limited liability because in that scenario every firm would have an incentive to take debt (a whatsoever small amount that may be) and pass on the burden to creditors. In order to rule out this seemingly unrealistic scenario, we restrict ourselves to the cases where the operating profit of the firm is strictly positive for all possible realisations of x i (see, Haan & Toolsema, 2008;Franck & Pape, 2008). 8.…”

Section: Summing Upmentioning

confidence: 99%

Financial Leverage, Innovation and Cournot Output: Limited Liability Effect Under Demand Uncertainty

Saxena

Bhattacharyya

2022

The Indian Economic Journal

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We address the strategic interdependence among capital structure, firm-level (process) innovation, and subsequent output decisions. In the backdrop of the limited liability effect, the interlinkage among financial and real variables is established through a three-stage game. The levered duopolist produces higher output and earns a larger profit than its unlevered counterpart. Even the industry output is higher when one of the duopolists is levered. However, if the levered duopolist undertakes investment in (process) innovation, then the debt-financed innovation induced output is larger than the innovation-led output of a completely equity financed firm. The levered innovative firm eventually becomes a monopolist by driving out the unlevered innovative duopolist. JEL Codes: D21, G32, L13, O31

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The commitment value of the debt: A reappraisal

Cited by 9 publications

References 12 publications

Endogenous market structures and the optimal financial structure

Endogenous market structures and the optimal financial structure

The limited liability effect: Implications for anticompetitive horizontal mergers

Financial Leverage, Innovation and Cournot Output: Limited Liability Effect Under Demand Uncertainty

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