Debt, agency costs, and industry equilibrium

Article Abstract:

We show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels. (Reprinted by permission of the publisher.)

Finance, Risk (Economics), Corporate finance, Cash flow, Debt financing (Corporations), Debt financing

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Vendor financing

Article Abstract:

This paper shows that, even in the presence of a perfectly competitive banking industry, it is optimal for firms with market power to engage in vendor financing if credit customers have lower reservation prices than cash customers or if adverse selection makes it infeasible to write credit contracts that separate customers by credit risk. We analyze how the advantage of vendor financing depends on the relative size of the cash and credit markets, the heterogeneity of credit customers, and the number of firms in the industry. (Reprinted by permission of the publisher.)

Banking industry, Analysis, Risk management, Industrial suppliers, Credit management, Commercial credit, Vendors and purchasers (Law)

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Comment on forward markets, stock markets, and the theory of the firm

Article Abstract:

In a recent article, MacMinn (5) argues that the presence of forward markets eliminates the incentives of the firm's manager to choose production levels that maximize firm value. In this comment, we show that his results do not depend on the presence of forward markets. The critical assumptions are that the manager is endowed with money rather than stock in the firm and that there is no competitive labor market for managers. In addition, his results require time-inconsistent behavior on the part of the firm's manager. (Reprinted by permission of the publisher.)

Management, Stocks, Labor supply, Labor force, Production control

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