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Strategic debt in vertical relationships: theory and evidence

De Fraja, Gianni and Piga, Claudio A. (2004) Strategic debt in vertical relationships: theory and evidence. Research in Economics, Vol. 58 (2), p. 103-123. ISSN 1090-9443. Article.

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DOI: 10.1016/j.rie.2004.02.001


We model a vertical relationship between two firms. Our main finding is that the downstream firm manipulates the extent of its debt in order to affect in its favour the contract offered by the upstream firm. Except for a very high interest rate, we find a conflict of interest between the two firms with regard to the extent of debt. This can be interpreted as a rationale for the constraint imposed by franchisors on the debt level of their franchisees. The theoretical analysis is tested using a dataset combining both survey and balance sheet data. We find evidence suggesting that debt may play a strategic role for those firms involved in close-knit vertical relationships.

Item Type:Article
ID Code:2838
Uncontrolled Keywords:Contract theory, capital structure, franchise
Subjects:Area 13 - Scienze economiche e statistiche > SECS-P/01 Economia politica
Divisions:001 Università di Sassari > 01 Dipartimenti > Economia, istituzioni e società
Copyright Holders:© 2004 University of Venice
Deposited On:26 Aug 2009 12:53

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