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Firm boundaries and financing with opportunistic stakeholder behaviour

Aney, Madhav S.; Appelbaum, Elie; Banerji, Sanjay

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Madhav S. Aney

Elie Appelbaum


We explore the impact of strategic behaviour of equity holders, debt holders and an opportunistic supplier of a critical input on the firm's capital structure, organisational design, and its outsourcing decision. We show that the supplier can trigger strategic bankruptcy even when the firm is solvent. Equity holders respond to this either by eliminating the supplier and producing the input in-house or by reducing their exposure to debt by using equity-financing. Both responses introduce inefficiency since input costs are higher with in-house production, and debt is cheaper than equity. We show that the equilibrium debt-equity ratio varies positively with cash-flow profitability and the marginal cost of the supplier's input, but negatively with the riskiness of the cash flow and the equity holders' in-house input production costs.

Journal Article Type Article
Acceptance Date Dec 19, 2018
Online Publication Date Jan 3, 2019
Publication Date 2019-06
Deposit Date Jan 14, 2019
Publicly Available Date Jul 4, 2020
Journal Journal of Corporate Finance
Print ISSN 0929-1199
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 56
Pages 437-457
Keywords incomplete contracts; opportunistic behaviour; bankruptcy; capital structure
Public URL
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