Citation

Discussion Paper Details

Please find the details for DP2049 in an easy to copy and paste format below:

Full Details

Title: Inside versus Outside Financing and Product Market Competition

Author(s): Monika Schnitzer and Achim Wambach

Publication Date: December 1998

Keyword(s): Bertrand Competition, Corporate Finance, impact of financial Structure on competition, impact of product competition on financial structure and inside versus outside financing

Programme Area(s): Industrial Organization

Abstract: This paper investigates the interaction of firms' financial structure and their competitive behaviour on oligopolistic product markets. We consider risk-averse entrepreneurs who produce with uncertain production costs. To reduce their exposure to risk they can sell stocks to risk-neutral outside-investors. We show that in equilibrium the entrepreneurs prefer not to fully transfer this risk to outside-financiers because it reduces the competitive pressure on the product market. Furthermore, we discuss how the optimal financial structure reacts to variations in entrepreneurs' risk aversion, the level of cost uncertainty and the number of competitors.

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Bibliographic Reference

Schnitzer, M and Wambach, A. 1998. 'Inside versus Outside Financing and Product Market Competition'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2049