By Kai Rudolph
The first goal of this booklet is to illustrate firm's financing choice relies between different issues on bargaining strength issues and to demonstrate capability purposes for this dependency. in accordance with a principal-agent research the place a lender (principal) and an organization (agent) discount the right way to finance the firm’s dicy undertaking it truly is e.g. proven that - the benefits of debt financing elevate with the firm's bargaining strength; - the favorability of non-public placements compared to public choices raises with a firm's bargaining strength; - the firm's agreement variety and location mode selection are interrelated and needs to be taken care of together while making a choice on the firm’s optimum financing selection; - within the presence of an ex-ante informational asymmetry concerning the firm's financing and the creditors' revenue possible choices the agreement contract chance relies (in a non-monotonous approach) at the firm's bargaining energy.
Read or Download Bargaining Power Effects in Financial Contracting: A Joint Analysis of Contract Type and Placement Mode Choices (Lecture Notes in Economics and Mathematical Systems, 577) PDF
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Extra resources for Bargaining Power Effects in Financial Contracting: A Joint Analysis of Contract Type and Placement Mode Choices (Lecture Notes in Economics and Mathematical Systems, 577)
This hypothesis is based on models of oligopolistic behavior showing t h a t collusive arrangements are ^^ Banks with market power face downward sloping demand curves and their loan supply is determined by the standard requirement of equality between the Lerner indices and the inverse elasticities (cf. Freixas and Rochet (1997)). Any reduction 30 2 A Review of Related Research less costly to maintain in an oligopolistic than in a fully competitive markets (cf. Goldberg and Rai (1996)). In line with this prediction, for example, Guzman (2000) shows that credit rationing is more likely to occur in a banking monopoly than in a fully competitive banking market.
Alternatively, we could assume that an infinite number of projects with the same expected return /i but difi'erent disparities ^ exist (^ G [0, Cmaa;]), while the borrower's project choice is unobservable for the lender. 38 3 A Model to Analyze Bargaining Power Effects examine bargaining power effects in financial contracting, we are concerned about the effects of variations in bargaining power on the preferred ct/pmchoice. We do not want to derive optimal contracts for the described situation.
They find that banks, i. e. relationship lenders, try to accumulate collateral to improve their bargaining position when the firm experiences financial distress. 2 Relationship Lending Another aspect firms have to consider when determining their optimal debt structure is whether to engage in relationship lending, i. e. establish an implicit long-term contract with a single investor, e. g. ^^ In the short-run relationship lending can be beneficial for the firm since being tied to a single lender might enable the lender to reduce the firm's initial interest payments and thereby the firm's potential incentive to engage in asset substitution (cf.