Inside Versus Outside Financing and Product Market Competition
CEPR Discussion Paper Series Number 2049
Posted: 31 Dec 1998
Date Written: December 1998
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.
JEL Classification: D43, G32, L13, L22
Suggested Citation: Suggested Citation