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Predation Due to Bargaining Power Difference in Financial Contracting

Author

Listed:
  • Kwok Ho Chan

    (United International College, Beijing Normal University - Hong Kong Baptist University, Zhuhai, China)

  • KaWai Terence Fung

    (United International College, Beijing Normal University - Hong Kong Baptist University, Zhuhai, China)

  • Zhou Lu

    (School of Management, New York Institute of Technology, USA)

Abstract

Previous literature presented a predation model based on agency problems in financial contracting. In that model, predation reduced prey’s cash flow through breaking the relationship between the prey and its investors as the prey is financially constrained. This paper presents a different model in which both the predator and the prey are financially constrained and in need of external funding. The only dissimilarity between the predator and the prey is their corresponding level of bargaining power in financial contracting over their respective investors. The asymmetry of bargaining power is the unique source of predatory behavior. Financial contract between firm with less bargaining power (prey) and its investor can deter predation if the predator cannot renegotiate the contract with its own investor. If renegotiation is available for the predator, no financial contract can successfully deter predation.

Suggested Citation

  • Kwok Ho Chan & KaWai Terence Fung & Zhou Lu, 2015. "Predation Due to Bargaining Power Difference in Financial Contracting," Economic Research Guardian, Weissberg Publishing, vol. 5(2), pages 121-132, December.
    • Handle: RePEc:wei:journl:v:5:y:2015:i:2:p:121-132
    as

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    References listed on IDEAS

    as
    1. Michel Poitevin, 1989. "Financial Signalling and the "Deep-Pocket" Argument," RAND Journal of Economics, The RAND Corporation, vol. 20(1), pages 26-40, Spring.
    2. Drew Fudenberg & Jean Tirole, 1986. "A "Signal-Jamming" Theory of Predation," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 366-376, Autumn.
    3. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    4. Fernandez-Ruiz, Jorge, 2004. "Predation due to adverse selection in financial markets," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 715-733, May.
    5. Snyder, Christopher M, 1996. "Negotiation and Renegotiation of Optimal Financial Contracts under the Threat of Predation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 325-343, September.
    6. Drew Fudenberg & Jean Tirole, 1985. "Predation Without Reputation," Working papers 377, Massachusetts Institute of Technology (MIT), Department of Economics.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Predation; Long-purse; Signal-jamming; Financial Contracts; Bargaining Power;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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