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Strategic debt in vertical relationships: theory and evidence

journal contribution
posted on 30.05.2006, 11:33 by Gianni De Fraja, Claudio Piga
We model a vertical relationship between two firms. Our main finding is that the downstream firm manipulates the extent of its debt in order to affect in its favour the contract offered by the upstream firm. Except for a very high interest rate, we find a conflict of interest between the two firms with regard to the extent of debt. This can be interpreted as a rationale for the constraint imposed by franchisors on the debt level of their franchisees. The theoretical analysis is tested using a dataset combining both survey and balance sheet data. We find evidence suggesting that debt may play a strategic role for those firms involved in close-knit vertical relationships.

History

School

  • Business and Economics

Department

  • Economics

Pages

215155 bytes

Citation

DE FRAJA, G. and PIGA, C., 2004. Strategic debt in vertical relationships: theory and evidence. Research in Economics, 58, pp. 103-123.

Publisher

© Elsevier

Publication date

2004

Notes

This is Restricted Access. This article was published in the journal, Research in Economics [© Elsevier] and is available at: http://www.sciencedirect.com/science/journal/10909443.

ISSN

1090-9443

Language

en

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Keywords

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