Debt, Managers and Cartels

Salvatore Piccolo (salvapiccolo@gmail.com) and Giancarlo Spagnolo

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We propose a theory of anticompetitive effects of debt finance based on the interaction between capital structure, managerial incentives, and firms ability to sustain collusive agreements. Shareholders' commitments not to expropriate debtholders through managers with valuable reputations or common incentive schemes greatly facilitate collusive behavior in product markets. Disclosure rules aimed at improving transparency in corporate governance or network-based credit markets can confer credibility to such arrangements even in environments where firms lack commitment power, thereby inducing collusion through leverage in otherwise competitive downstream industries. Managers are happy with the arrangement since they share in the collusive rent.

Keywords: Bankruptcy; capital structure; collusion; corporate governance; credit markets; disclosure rules; financial regulation; managerial incentives; product market competition. (search for similar items in EconPapers)
JEL-codes: D21 G32 L13 L41 (search for similar items in EconPapers)
Date: 2014-06-06
New Economics Papers: this item is included in nep-ban, nep-bec, nep-com and nep-law
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