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TOPIC:
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FIRM BOUNDARIES AND FINANCING WITH OPPORTUNISTIC STAKEHOLDER BEHAVIOUR
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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 fi rm 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) pro fitability 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.
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PRESENTER
Sanjay Banerji
University of Nottingham
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RESEARCH FIELDS
Financial Economics
Corporate Finance
Information Economics
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DATE:
12 March 2018 (Monday)
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TIME:
4pm - 5.30pm
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VENUE:
Meeting Room 5.1, Level 5
School of Economics
Singapore Management University
90 Stamford Road
Singapore 178903
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