Anti-Competitive Financial Contracting: The Design of Financial Claims

39 Pages Posted: 19 Feb 2002

See all articles by Giacinta Cestone

Giacinta Cestone

Bayes Business School, City University London; ECGI

Lucy White

Centre for Economic Policy Research (CEPR); Boston University - Department of Finance & Economics

Date Written: January 2002

Abstract

This Paper presents the first model where entry deterrence takes place through financial rather than product-market channels. In standard models of the interaction between product and financial markets, a firm's use of financial instruments deters entry by affecting product market behaviour, whereas in our model entry deterrence occurs by affecting the credit market behaviour of investors towards entrant firms. We find that in order to deter entry, the claims held on incumbent firms should be sufficiently risky, ie equity, in contrast to the standard Brander-Lewis (1986) result that debt deters entry. We show that this effect is more marked, the less competitive is the credit market, implying that more credit market competition spurs more product market competition. The model can be used to shed light on the mode of financing of start-up industries and the policy debate on the separation of banking as to whether banks should be permitted to hold equity in firms.

Keywords: Coase problem, equity, over-funding, venture capital

JEL Classification: G30

Suggested Citation

Cestone, Giacinta and White, Lucy, Anti-Competitive Financial Contracting: The Design of Financial Claims (January 2002). Available at SSRN: https://ssrn.com/abstract=301216

Giacinta Cestone (Contact Author)

Bayes Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Lucy White

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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