 The limited liability effect: Implications for anticompetitive horizontal mergersBernard Franck and Nicolas Le Pape Journal of Public Economic Theory, 2020, vol. 22, issue 6, 2082-2102 Abstract: We consider an industry including both leveraged and unleveraged firms engaged in a sequential decision‐making process. At the first stage a firm and its bank, considering the production cost uncertainty and the probability distribution of the random shock, evaluate a bankruptcy risk; at the second stage firms engage in Cournot competition. By introducing an additional upstream stage we examine how incentives to merge with competitors are altered when shareholders of leveraged firms are protected by the limited liability. We demonstrate that a merger increases the probability of bankruptcy for the merged firm if the merger involves only leveraged firms, but this probability decreases if the merger involves at least one unleveraged firm. The welfare loss associated with anticompetitive effects of mergers is lower when the coalition gathers unleveraged firms rather than leveraged ones. Consequently, we argue that in evaluating proposed mergers Competition Authorities should take into account the financial structure of both merging firms and outsiders. Date: 2020 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:jpbect:v:22:y:2020:i:6:p:2082-2102 Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Public Economic Theory is currently edited by Rabah Amir, Gareth Myles and Myrna Wooders More articles in Journal of Public Economic Theory from Association for Public Economic Theory Contact information at EDIRC. |
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