SMU SOE Seminar (Mar 12, 2018): Firm Boundaries and Financing with Opportunistic Stakeholder Behaviour

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TOPIC:

FIRM BOUNDARIES AND FINANCING WITH OPPORTUNISTIC STAKEHOLDER BEHAVIOUR

ABSTRACT We explore the impact of strategic behaviour between three major stakeholders, namely equity holders, debt holders, and a supplier of a critical input, on the choice of a firm's capital structure and its organisational design, determining in-house production versus outsourcing the procurement of the critical input. We show that an opportunistic coalition of the supplier and debt holders can trigger strategic bankruptcy even when the firm is solvent. Equity holders respond to this by either eliminating the supplier by producing the input in-house, or by reducing the exposure to debt by funding the firm's capital requirement through equity. Both responses create inefficiency since production of the input in-house is costlier and debt is cheaper than equity. We show that the debt-equity ratio in equilibrium varies positively with (a) profitability of the cash flow and (b) marginal cost of the supplier's input, but negatively with (c) riskiness of the cash flow and (d) equity holders' costs of producing the input in-house. Keywords: Incomplete Contracts, Opportunistic Behaviour, Bankruptcy, Capital Structure. JEL Classification: D0, C7, G3, L2 Click here to view the paper. Click here to view the CV.
		PRESENTER Sanjay Banerji University of Nottingham
		RESEARCH FIELDS Financial Economics Corporate Finance Information Economics
		DATE: 12 March 2018 (Monday)
		TIME: 4pm - 5.30pm
		VENUE: Meeting Room 5.1, Level 5 School of Economics Singapore Management University 90 Stamford Road Singapore 178903

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