By Dr. Cornelia Neff (auth.)
This e-book analyzes how company finance judgements impression strategic pageant and innovation of companies within the product industry. We reflect on financial institution mortgage financing and enterprise capital financing. because of assymetric info, companies needs to signal detailed contracts with banks or enterprise capitalists. The monetary contracts, in flip, be certain the aggressive concepts of agencies within the product marketplace. organisations compete in costs for marketplace stocks. as well as that, agencies put money into R&D with a view to set off product or procedure innovation. We convey that larger entry to monetary assets improves a firm's marketplace place and results in a better expense of innovation. Cash-rich organizations can even choose to prey upon financially limited competitors so as to hinder new industry access or to urge industry go out.
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Extra resources for Corporate Finance, Innovation, and Strategic Competition
Opler and Titman (1994) study firms in financial distress and find out that highly leveraged firms loose market shares to their less leveraged competitors. An increase in debt level - especially in R&D intensive industries - leads to an inferior competitive position in the product market. Phillips (1995) investigates production policy and pricing strategies in markets where the general leverage of firms increased substantially. The increase in debt from 30 percent to 80 percent is generated by leveraged buyout activities.
This, in tum, induces a price change of the rival firm according to its reaction function. If, on the other hand, /'t' (1- X) < 2/HQ holds, then there exists a unique equilibrium in which both firms produce high-quality products and charge lower first-period prices than in case of all-equity financing of firm}. 6 (Quality choice and debt) Suppose firm i is all self-financed, while firm} needs external debt financing. 28') is fulfilled, both firms will produce high quality and will choose lower first-period prices than under complete self-financing.
This induces first-period prices to rise and, in tum, softens the price competition. If, however, product quality is introduced as another strategic variable into the competition game, the results will be reversed: Price competition becomes more intense because firms strategically reduce their firstperiod prices in order to signal high-quality production and to supply to a large customer base in the second period. In this scenario, predation becomes possible: If one firm needs external debt financing while the other is self-financed, the self-financed rival may undercut the equilibrium price by just a small margin.
Corporate Finance, Innovation, and Strategic Competition by Dr. Cornelia Neff (auth.)