Firm boundaries and financing with opportunistic stakeholder behaviour

We explore the impact of strategic behaviour between three major stakeholders, namelyequity holders, debt holders, and a supplier of a critical input, on the choice of a firm’s capitalstructure and its organisational design, determining in-house production versus outsourcing theprocurement of the cr...

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Main Authors: ANEY, Madhav S., APPELBAUM, Elie, BANERJI, Sanjay
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Language:English
Published: Institutional Knowledge at Singapore Management University 2017
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Online Access:https://ink.library.smu.edu.sg/soe_research/1964
https://ink.library.smu.edu.sg/context/soe_research/article/2963/viewcontent/CapitalStructure.pdf
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spelling sg-smu-ink.soe_research-29632019-01-04T01:59:29Z Firm boundaries and financing with opportunistic stakeholder behaviour ANEY, Madhav S. APPELBAUM, Elie BANERJI, Sanjay We explore the impact of strategic behaviour between three major stakeholders, namelyequity holders, debt holders, and a supplier of a critical input, on the choice of a firm’s capitalstructure and its organisational design, determining in-house production versus outsourcing theprocurement of the critical input. We show that an opportunistic coalition of the supplierand debt holders can trigger strategic bankruptcy even when the firm is solvent. Equity holdersrespond to this by either eliminating the supplier by producing the input in-house, or by reducingthe exposure to debt by funding the firm’s capital requirement through equity. Both responsescreate inefficiency since production of the input in-house is costlier and debt is cheaper thanequity. We show that the debt-equity ratio in equilibrium varies positively with (a) profitabilityof the cash flow and (b) marginal cost of the supplier’s input, but negatively with (c) riskinessof the cash flow and (d) equity holders’ costs of producing the input in-house. 2017-04-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/soe_research/1964 https://ink.library.smu.edu.sg/context/soe_research/article/2963/viewcontent/CapitalStructure.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection School Of Economics eng Institutional Knowledge at Singapore Management University Incomplete Contracts Opportunistic Behaviour Bankruptcy Capital Structure Finance Growth and Development
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Incomplete Contracts
Opportunistic Behaviour
Bankruptcy
Capital Structure
Finance
Growth and Development
spellingShingle Incomplete Contracts
Opportunistic Behaviour
Bankruptcy
Capital Structure
Finance
Growth and Development
ANEY, Madhav S.
APPELBAUM, Elie
BANERJI, Sanjay
Firm boundaries and financing with opportunistic stakeholder behaviour
description We explore the impact of strategic behaviour between three major stakeholders, namelyequity holders, debt holders, and a supplier of a critical input, on the choice of a firm’s capitalstructure and its organisational design, determining in-house production versus outsourcing theprocurement of the critical input. We show that an opportunistic coalition of the supplierand debt holders can trigger strategic bankruptcy even when the firm is solvent. Equity holdersrespond to this by either eliminating the supplier by producing the input in-house, or by reducingthe exposure to debt by funding the firm’s capital requirement through equity. Both responsescreate inefficiency since production of the input in-house is costlier and debt is cheaper thanequity. We show that the debt-equity ratio in equilibrium varies positively with (a) profitabilityof the cash flow and (b) marginal cost of the supplier’s input, but negatively with (c) riskinessof the cash flow and (d) equity holders’ costs of producing the input in-house.
format text
author ANEY, Madhav S.
APPELBAUM, Elie
BANERJI, Sanjay
author_facet ANEY, Madhav S.
APPELBAUM, Elie
BANERJI, Sanjay
author_sort ANEY, Madhav S.
title Firm boundaries and financing with opportunistic stakeholder behaviour
title_short Firm boundaries and financing with opportunistic stakeholder behaviour
title_full Firm boundaries and financing with opportunistic stakeholder behaviour
title_fullStr Firm boundaries and financing with opportunistic stakeholder behaviour
title_full_unstemmed Firm boundaries and financing with opportunistic stakeholder behaviour
title_sort firm boundaries and financing with opportunistic stakeholder behaviour
publisher Institutional Knowledge at Singapore Management University
publishDate 2017
url https://ink.library.smu.edu.sg/soe_research/1964
https://ink.library.smu.edu.sg/context/soe_research/article/2963/viewcontent/CapitalStructure.pdf
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