SFB 303 Discussion Paper No. A - 211
Author: Broeker, Thorsten
Title: On the Strategic Relevance of the Financial Structure of Firms in a Two-Period Cournot Duopoly
Abstract: In this paper, we analyze the strategic relevance of the financial structure of a firm when it is engaged in
oligopolistic competition over time. Specifically, we consider a two-period Cournot duopoly. Before a firm can
enter the market, it has to pay some set-up cost. A firm can raise the funds needed by demanding debt or equity
financing on a capital market. At the end of period one, first shareholders and then creditors of a firm are
allowed to decide whether or not to liquidate the firm. The creditors’ right to liquidate a firm is linked to the
disability of the firm to meet its repayment obligations in this period. Being able to move first gives the
shareholders of a firm a strategic advantage over the creditors of the other firm. A firm may now be able to force
its competitor be declared bankrupt by the creditors of the latter firm. It may be profitable to force its competitor
out of the market, because now the firm will receive monopoly profit in the second period of the game. Due to
the fact that the flow of gross profits of a firm does depend on its financial structure, we obtain two results: first,
the value of a firm depends on the financial structure of both firms and therefore the Modigliani-Miller Theorem
does not hold, and second, if we include the financial market into the game, then, depending on the subgame
perfect continuation of the game, certain financial structures will not occur as an equilibrium of the capital
market.
Keywords:
JEL-Classification-Number:
Creation-Date: November 1988
Unfortunately this paper is not available online. Please contact us to order a hardcopy.
SFB 303 Homepage
09.09.1999, Webmaster