Capital Structure with Opportunistic Stakeholders' Coalitions

Elie Appelbaum and Sanjay Banerji ()
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Sanjay Banerji: Finance Group, Essex Business School, University of Essex, Colchester, United Kingdom

Working Papers from York University, Department of Economics

Abstract: This paper shows that stakeholders' multilateral opportunistic behaviour during financial distress may lead to premature liquidation of the firm. Consequently, the firm will use its capital structure to mitigate the costs of such opportunism. Specifically, the firm will reduce its debt so that the probability of multilateral opportunism is zero; namely, it will use only safe debt. The paper predicts that the debt-equity ratio will decrease with risk, the number of contracts, the difficulty in writing them and in achieving franchising arrangements, the supplier's importance in opportunistic coalitions and a decrease in the firm's size, or the supplier's adjustment costs.

Keywords: Incomplete Contracts; Opportunistic Behaviour; Bankruptcy; Capital Structure. (search for similar items in EconPapers)
JEL-codes: C7 D0 G3 L2 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2010-05
New Economics Papers: this item is included in nep-bec
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