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Anticompetitive Financial Contracting: The Design of Financial Claims
Author(s) -
Cestone Giacinta,
White Lucy
Publication year - 2003
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00599
Subject(s) - equity (law) , product market , business , finance , debt , competition (biology) , deterrence theory , barriers to entry , economics , monetary economics , financial system , market structure , industrial organization , microeconomics , ecology , physics , political science , nuclear physics , law , biology , incentive
Abstract This paper presents the first model where entry deterrence takes place through financial rather than product‐market channels. In existing models, a firm's choice of financial instruments deters entry by affecting product market behavior; here entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms. We find that to deter entry, the claims held on incumbent firms should be sufficiently risky, that is, equity . This contrasts with the standard Brander and Lewis (1986) result that debt deters entry. This effect is more marked the less competitive the credit market is—so more credit market competition spurs more product market competition .