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The limited liability effect: Implications for anticompetitive horizontal mergers
Author(s) -
Franck Bernard,
Le Pape Nicolas
Publication year - 2020
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12441
Subject(s) - bankruptcy , shareholder , cournot competition , incentive , merge (version control) , limited liability , competitor analysis , business , competition (biology) , industrial organization , microeconomics , mergers and acquisitions , liability , leverage (statistics) , economics , monetary economics , finance , corporate governance , marketing , ecology , machine learning , biology , computer science , information retrieval
We consider an industry including both leveraged and unleveraged firms engaged in a sequential decision‐making process. At the first stage a firm and its bank, considering the production cost uncertainty and the probability distribution of the random shock, evaluate a bankruptcy risk; at the second stage firms engage in Cournot competition. By introducing an additional upstream stage we examine how incentives to merge with competitors are altered when shareholders of leveraged firms are protected by the limited liability. We demonstrate that a merger increases the probability of bankruptcy for the merged firm if the merger involves only leveraged firms, but this probability decreases if the merger involves at least one unleveraged firm. The welfare loss associated with anticompetitive effects of mergers is lower when the coalition gathers unleveraged firms rather than leveraged ones. Consequently, we argue that in evaluating proposed mergers Competition Authorities should take into account the financial structure of both merging firms and outsiders.