Mergers and the limited liability effect

M. Pilar Socorro

Documentos de trabajo conjunto ULL-ULPGC from Facultad de Ciencias Económicas de la ULPGC

Abstract: This paper analyzes the effects of mergers in a homogenous product market with uncertainty over demand, fixed costs, and limited liability debt financing. On the one hand, given the limited liability e.ect, merging parties compete more aggressively and mergers that were unprofitable in absence of any debt obligation may become beneficial. On the other hand, socially advantageous mergers may be unprofitable for the colluding firms. In these cases, public intervention is needed. One possibility consists on subsidizing such mergers. However, it is proved that the combination of limited liability debt financing and an appropriate antitrust policy leads to higher social welfare than subsidies.

Keywords: merger; limited liability; debt (search for similar items in EconPapers)
Pages: 24 pages
Date: 2004-11
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