Abstract
Purpose – This paper highlights the interaction between innovation and financial structure under duopoly with a monopoly debater. Design/methodology/approach – By game-theory approaches, we characterize effects of debt levels on innovative investment with limited liability effect. Findings – This paper argues that higher debt levels increase both innovative investment and output. Both higher debt rate and higher debt levels act as commitment to reduce opponent firms’ net profits. Net profit for unit debt is reduced with higher debt level and higher debt rate. Originality/value – This study extends Brander and Lewis’s (1986) to innovative situation and no interior point solution is restricted.
Highlights
Modigliani and Miller’s (1958) study has a profound influence on corporate finance theory and industrial organization theory, because the M-M theory isolates the interaction between capital market and product market by stating that capital structure has no impact on the value of the firm
Brander and Lewis (1986) argued that firms’ values have something to do with their capital structure, and their study established an inherent connection between capital market and product market
Understanding the interaction between capital structure and product market competition is critical for decision maker of firms
Summary
Modigliani and Miller’s (1958) study has a profound influence on corporate finance theory and industrial organization theory, because the M-M theory isolates the interaction between capital market and product market by stating that capital structure has no impact on the value of the firm. Brander and Lewis (1986) make a great challenge to the M-M theory because they captured the relationship between financial structure and output of firms based on Jansen and Meckling’s model (1976) initially. Their studies found that higher debt levels improved quantity of output and the value of the firm. Many studies focused on the relationships between firm’s capital structure and its competition behaviors in the product market and different or even opposite conclusions are obtained. We characterize two producers with monopoly debater in order to identify the effect of price discrimination of debt on output market and innovation decisions. Some remarks of conclusions are presented in the final section
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