Capital Structure and Firm Boundaries with Opportunistic Stakeholders

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Firm boundaries and financing with opportunistic stakeholder behaviour

Journal of Corporate Finance, 2019

Abstract: 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, organizational 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 in-house production costs of the input are higher, and debt is cheaper than equity. We show that the equilibrium debt-equity ratio varies positively with cash-flow profitability and the supplier's input marginal cost, but negatively with the riskiness of the cash flow and the equity holders' in-house input production costs.

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Publication Title:
Capital Structure and Firm Boundaries with Opportunistic Stakeholders

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Elie Appelbaum

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Madhav Aney and Sanjay Banerji

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Journal of Corporate Finance

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