INSTITUT F=DCR H=D6HERE STUDIEN INSTITUTE FOR ADVANCED STUDIES =09 A-1060 Wien, Stumpergasse 56 Telefon: (0222) 59 9 91 Telefax: (0222) 597 06 35

SEMINAR IN FINANCE Christian Helmenstein, Gabriel Lee (Biweekly Mondays)

Monday, 2. June 1997

E. J. Dockner, H. Elsinger, A. Gaunersdorfer (University of Vienna)

"The Strategic Role of Dividends and Debt in Markets=20 with Imperfect Competition"

Abstract While many existing models in the literature on financial structure do ignore product market strategies, Brander and Lewis (1986) argue that there are important linkages between the two. In particular they show that oligopolistic firms with limited liability follow a more aggressive output strategy as their leverage increases. In a follow up paper Glazer (1994) points out that this result crucially depends on the assumption that debt is short-term. If on the contrary debt is long-term and rival firms chose their equilibrium in period one and two, they do have an incentive to be more collusive in the first period than static oligopolists would be and hence output decreases. On the basis of this result Glazer concludes that the degree of price fluctuations on product market will increase with the level of firm=92s debt. In this paper we argue that the incentive to collude is driven by limited liability and the dividend policy of the firm. We find that increasing leverage causes firms in both periods to increase their output and hence be more aggressive. Moreover, we show by means of a numerical example that the symmetric game admits multiple equilibria some of which cause firms to choose asymmetric product market strategies. This leads us to conclude that firms with similar leverage and product market characteristics might very well choose quite different product market stragegies.

Place: Institute for Advanced Studies, Stumpergasse 56, 1060 Vienna, SZ VI= =20 Time: 17:00h-18:30h Info: http://www.ihs.ac.at/fin/finsem.html =========================================================================