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Oligopoly and Financial Structure: The Limited Liability Effect
James A. Brander and Tracy R. Lewis
The American Economic Review
Vol. 76, No. 5 (Dec., 1986), pp. 956-970
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/1816462
Page Count: 15
You can always find the topics here!Topics: Debt, Capital structure, Oligopolies, Equity, Debt to equity ratio, Residual claimant theory of wages, Financial management, Bankruptcy, Debt financing, Shareholders
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We argue that product markets and financial markets have important linkages. Assuming on oligopoly in which financial and output decisions follow in sequence, we show that limited liability may commit a leveraged firm to a more aggressive output stance. Because firms will have incentives to use financial structure to influence the output market, this demonstrates a new determinant of the debt-equity ratio.
The American Economic Review © 1986 American Economic Association