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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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 |
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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 |
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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. |
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ANEY, Madhav S. APPELBAUM, Elie BANERJI, Sanjay |
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ANEY, Madhav S. APPELBAUM, Elie BANERJI, Sanjay |
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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 |
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Firm boundaries and financing with opportunistic stakeholder behaviour |
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firm boundaries and financing with opportunistic stakeholder behaviour |
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Institutional Knowledge at Singapore Management University |
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2017 |
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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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