Strategic debt in vertical relationships: Theory and evidence

Gianni De Fraja, Claudio A.G. Piga

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)103-123
Number of pages21
JournalResearch in Economics
Volume58
Issue number2
DOIs
Publication statusPublished - 1 Jun 2004
Externally publishedYes

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