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- Title
Optimal capital structure with supplier market power.
- Authors
Cui, Xue; Sarkar, Sudipto; Zhang, Chuanqian
- Abstract
We use a real‐option model to study the effect of input supplier's market power on a firm's capital structure, and identify the Nash equilibrium outcome (firm's investment and financing policies and its supplier's pricing policy). When its supplier has market power, the firm will reduce leverage ratio and delay investment. This can help explain why observed leverage ratios are lower than in traditional capital‐structure models (without supplier market power). Firm value can be increased by the vertical acquisition of the supplier, which would also result in a higher leverage ratio. This helps explain the observed increase in leverage ratios after acquisitions.
- Subjects
MARKET power; CAPITAL structure; MARKET design &; structure (Economics); ENTERPRISE value; NASH equilibrium; REAL options (Finance)
- Publication
Accounting & Finance, 2024, Vol 64, Issue 2, p1805
- ISSN
0810-5391
- Publication type
Article
- DOI
10.1111/acfi.13200