Bargaining Power Effects in Financial Contracting: A Joint by Kai Rudolph

By Kai Rudolph

This paintings used to be authorised as a dissertation through the college of Muenster, Germany, in 2004. It was once written whereas i used to be a instructing and study assistant on the division of Banking. I personal many accounts - own and highbrow - to Professor Dr. Andreas Pfingsten, my doctoral adviser, for his total help whereas i used to be writing my dissertation. This thesis benefited a lot from his confident feedback. i'm additionally thankful that Professor Dr. Klaus Roder, division of Finance, collage of Regensburg, Germany, acted as my moment consultant. moreover, i need to thank Dr. Alistair Milne, Sir John Cass company university, urban college, nice Britain, on account that he assisted me in the course of an important part of my dissertation venture whereas i used to be staying as a traveling student on the Marie Curie education website in company Finance, Capital Markets and Banking at Cass. This 5 month stopover at in London was once financially supported by means of the eu fee (Fellowship Ref. No. HPMT-GH-01-00330-04). i'm additionally indebted to my earlier colleagues, quite often Dr. Hendrik Hakenes and Dr. Markus Ricke, for his or her encouragement and precious discussions all through my entire dissertation undertaking. The dissertation additionally benefited from reviews on a primary operating paper in regards to the dissertation's subject through contributors of analysis seminars on the Universities of Constance, Tuebingen and Osnabrueck, Germany, and on the 2003 Annual assembly of the eu monetary organization, Stockholm, Sweden.

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Extra resources for Bargaining Power Effects in Financial Contracting: A Joint Analysis of Contract Type and Placement Mode Choices

Sample text

Firstly, we examine the implications of a potential ex-ante informational asymmetry between lender and borrower for a firm's placement mode choice before considering the effects of an interim asymmetry. ^^ The factors affecting debt's placement decision are similar to the factors influencing equity's placement mode choice while differences arise due to equityholders' right to control the firm in the non-default state, i. e. when debtholders' claims are satisfied. 2 . 1 . 2 . 1 Debt's Placement Mode Each firm's debt placement mode choice is affected by ex-ante informational asymmetries between lender and borrower, since each borrowing decision causes adverse selection difficulties for financial contracting (cf.

This simplification is relaxed in Chapter 4 when an ex-ante informational asymmetry concerning the lender's financing and the borrower's profit opportunity is introduced. '* T h e expected project return n and the maximum risk (max {(max G [0,1]) are common knowledge. ^ • Ex-post uncertainty: In t = 1 the borrower obtains private information about the actual project return realization which cannot be observed by the lender. D Such a situation is possible in a wide range of circumstances. For example, imagine the entrepreneur plans to open a trouser shop in t = 0 while the demand for trousers is uncertain (risky project), and the entrepreneur can unobservably choose the range he offers, which can range from a diversified mix to a specialization in green leggings (interim uncertainty).

Instead the firm pursues an aggressive output policy. Thereby, the firm's bargaining position against its rivals is improved due to (strategic) debt financing. Dasgupta and Nanda (1993) show that for regulated firms their capital structure choice, i. e. its leverage, is an effective bargaining device to induce the regulator to set higher prices for the firm's output. Equityholders' bargaining advantage arises since the main costs of any bargaining failure are borne by the bondholders. The equityholders are protected by limited liability.

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