Corporate Finance, Innovation, and Strategic Competition

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Springer Science & Business Media, Nov 13, 2002 - Business & Economics - 218 pages
Industrial organization considers strategic behavior of firms in the product market. Firms compete in prices and invest in innovation activities in order to gain market shares. In this book I will investigate the financial decisions of innovative firms if financial markets are imperfect due to asymmetric information. I will demonstrate how financial market imperfections interact with strategic competition of firms in the product market. The tool to analyze these strategic interactions is non­ cooperative game theory. This book was written while I was assistant professor at the department of economic theory at the University of Tlibingen. I wish to thank my supervisor Manfred Stadler for having suggested this interesting research subject. He introduced me to the exciting field of industrial organization and the economics of information. As my supervisor, he gave me great freedom to pursue my research. I would like to thank my colleagues Jiirgen Volkert, Andreas Scheuerle, Stephan Hornig, RUdiger Wapler and Leslie Neubecker for the nice and friendly atmosphere at our office. Katharina Wichert, Frank Breitling, Andrea Schrage, Stephan Gobel, Christina Schumacher, Alexandra Zaby, Tina Bach-Adetunji and Vanessa Steinmeier provided valuable research assistance. I am grateful to Werner Neus for being my second supervisor. He showed me that the department of banking and business administration and the department of economic theory share common views on financial markets under asymmetric information.
 

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Contents

1 Introduction
1
2 Financial structure and strategic competition
4
21 Financial structure decision of an individual firm
5
212 Theories of optimal capital structure
6
22 Financial structure and product market competition
7
221 Optimal capital structure in a static framework
8
2212 Limited liability effect and capacity competition
14
222 Capital structure in a dynamic framework
22
34 Conclusion
103
35 Appendix
104
4 Venture capital financing and strategic competition
106
41 Introduction
107
412 Characteristics of venture capital financing
110
42 Venture capital financing the individual firms perspective
113
421 Allocation or control rights
114
4212 The search for a professional management
122

2222 Impact of consumer s witch ing costs
27
2223 Product quality and longterm debt
29
2224 Predatory pricing
34
2225 Summary
35
223 Capital structure and market entry
36
2232 Output stage
39
2233 Financial stage
41
23 Empirical findings
42
24 Conclusion
43
3 Credit financing and strategic competition
46
Contract theory
47
312 The revelation principle
48
The individual firmbank relationship
49
321 Moral hazard
50
3212 Renegotiation of the standard debt contract
54
322 Multiperiod credit contracting
56
3222 Longterm contracting when costly state verification is not possible
57
323 Discussion
61
33 Credit financing and product market competition
62
331 Credit financing and price competition
63
3312 Credit financing market power of banks and price competition
69
332 Credit financing innovation and product market competition
76
3322 A dynamic game of innovation and price competition
77
3323 Optimal debt contract for one externally financed firm
87
3324 Optimal contracts when both firms need external debt financing
94
3325 Predation
100
333 Discussion
101
4213 Efficient intervention by the venture capitalist
123
4214 Discussion
125
4221 Moral hazard and financial instruments
126
4222 Double moral hazard
129
4223 Contracting with a venture capitalist and an outside investor
135
4224 Dynamic contracting moral hazard and learning
141
4225 Discussion
150
43 Venture capital financing and product market competition
151
431 Assumptions
153
4311 The basic model
157
4312 Innovation entry and competition in the twoperiod framework
158
432 Venture capital contracting
161
4321 Shortterm contracting
162
4322 Longterm contracting
168
4323 Discussion of the results
176
433 Strategic reactions of the incumbent
178
4332 Predation
184
434 Discussion
189
44 Conclusion
191
45 Appendix
192
5 Conclusion
200
References
207
Figures
214
Tables
215
List of symbols
216
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