University of CEMA, June 2001
Prof: Hernan Ortiz-Molina
The Interaction Between Industrial Organization and Corporate Finance
The objective of the course is to introduce the student to a new promising area of
research. Traditionally IO economists have abstracted from financial considerations,
while financial economists have neglected the underlying market structure when studying
financial decisions. The main issue in this field is that the organization of the industry and
financial decisions are interdependent, and therefore the traditional (separate) approaches
are incomplete. The integration of these two aspects allows a much richer understanding
of both product market relationships and capital structure decisions.
Background textbooks:
The Theory of Industrial Organization, Jean Tirole, MIT Press
Financial Markets and Corporate Strategy, Mark Grinblatt & Sheridan Titman, McGrawHill
Course outline
1. Introd.: from perfect markets to theories of the firm & contracting problems.
Modigliani-Miller proposition
Manager-Equity Holder Conflicts
Principal Agent Problem
Use of debt to mitigate Manager-Equity Holder Conflicts
Debt Holder-Equity Holder Conflicts
Asset substitution
Reluctance to liquidate
Jensen, M. and W. Meckling, "Theory of the Firm: Managerial Behavior, Agency Costs
and Ownership Structure," Journal of Financial Economics. 1976, 3:305-360.
2. External contracting problems
2.1 Firm ownership
Klein, Benjamin, Robert Crawford, and Armen A. Alchian, Vertical Integration,
Appropriable Rents and the Competitive Contracting Process, Journal of Law and
Economics 21, 1978, 297–326.
Grossman, Sanford and Oliver Hart, 1986, The costs and benefits of ownership: A theory
of vertical and horizontal integration, Journal of Political Economy 94, 691-719.
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University of CEMA, June 2001
Prof: Hernan Ortiz-Molina
Allen, Jeff and Gordon Phillips, 1998, Corporate Equity Ownership and Product Market
Relationships, forthcoming Journal of Finance.
2.2 Contracting and capital structure (overview)
Harris, Milton and Artur Raviv, 1991, "The Theory of Capital Structure," Journal of
Finance. 46: 297-355. (Survey)
3. Financial structure and intra-industry competition
Brander, James A., and Tracy R. Lewis, 1986, "Oligopoly and financial structure,"
American Economic Review. 76, 956-970.
Brander, James A., and Tracy R. Lewis, (1988), "Bankruptcy costs and the theory of
oligopoly," Canadian Journal of Economics 21(2), 221-243.
Maksimovic, Vojislav, 1988a, "Capital structure in repeated oligopolies," Rand Journal
of Economics. 19, 389-407.
Maksimovic, Vojislav; Titman, Sheridan, "Financial Policy and Reputation for Product
Quality," Review of Financial Studies; 4(1), 1991, pages 175-200.
Sarig, Oded H., 1988, “Bargaining with a corporation and the capital structure of the
bargaining firm”
Bronars, Stephen and Donald Deere, 1991, “The Threat of Unionization, the Use of Debt,
and the Preservation of Shareholder Wealth”, Quarterly Journal of Economics, Vol 106,
Issue 1, page 231-254.
Maksimovic, Vojislav, 1990, Product market imperfections and loan commitments.
Journal of Finance, Vol XLV #5.
Phillips, Gordon, 1992, "Financial slack, refinancing decisions and firm competition”,
Working paper Purdue University.
Phillips, Gordon, 1995, "Increased Debt and Industry Product Markets: An Empirical
Analysis," Journal of Financial Economics, 37, 189-238.
Chevalier, Judith, 1995, "Debt and product market competition: Local market entry, exit,
and expansion decisions of supermarket chains." American Economic Review, 85, 41535.
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University of CEMA, June 2001
Prof: Hernan Ortiz-Molina
Chevalier, Judith, 1995, "Do LBO Supermarkets Charge More? An Empirical Analysis of
the Effects of LBOs on Supermarket Pricing," Journal-of-Finance; 50(4), September
1995, pages 1095-1112.
Kovenock, Dan and Phillips, Gordon, 1997, "Capital Structure and Product Market
Rivalry: An Examination of Plant Closing and Investment Decisions, Review of Financial
Studies, 1997, Volume 10:3.
4. Managerial ownership and firm competition
Fershtman, Chaim and Kenneth L. Judd, "Equilibrium Incentives in Oligopoly,"
American Economic Review, 1987, 77, 927-940.
Aggarwal, Rajesh, and Andrew Samwick, 1996, Executive Compensation, Strategic
Competition, and Relative Performance Evaluation: Theory and Evidence," working
paper, Dartmouth.
5. Managerial compensation and Debt Holder-Equity Holder Conflicts
John, Teresa A. and Kose John. “Top-Management Compensation and Capital Structure”,
Journal of Finance (July 1993), pp. 949-974.
Brander, James A. and Michel Poitevin. “Managerial Compensation and the Agency
Costs of Debt Finance”, Managerial and Decision Economics, vol. 13 (1992), pp. 55-64.
Ortiz-Molina, Hernan (2001) “High-Powered Incentives for CEOs and Financial
Structure: An Empirical Analysis”, paper in progress, University of Maryland.
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