Default Risk and Product Market Competition
Le Pape, Nicolas
Default Risk and Product Market Competition - 2015.
10
The strategic impact of debt on the firms’ behavior in the product market was originally investigated by Brander and Lewis [1986]. They have shown that debt increases the level of competition in the industry. However, the lending policy of an increasing number of banks is based on an assessment of the borrower’s ability to repay the loan (scoring methods). The objective of this paper is to revisit models developed in Industrial Organization which focus on the strategic function of debt by recognizing a strategic function to the risk of default. We show that the strategic use of a default risk (instead of a level of debt) makes the firm more aggressive in the product market.Classification JEL : G32, L13, L22.
Default Risk and Product Market Competition - 2015.
10
The strategic impact of debt on the firms’ behavior in the product market was originally investigated by Brander and Lewis [1986]. They have shown that debt increases the level of competition in the industry. However, the lending policy of an increasing number of banks is based on an assessment of the borrower’s ability to repay the loan (scoring methods). The objective of this paper is to revisit models developed in Industrial Organization which focus on the strategic function of debt by recognizing a strategic function to the risk of default. We show that the strategic use of a default risk (instead of a level of debt) makes the firm more aggressive in the product market.Classification JEL : G32, L13, L22.
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