Corporate Finance, Innovation, and Strategic Competition
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This book analyzes how corporate finance decisions influence strategic competition and innovation of firms in the product market. We consider bank loan financing and venture capital financing. Due to assymetric information, firms must sign special contracts with banks or venture capitalists. The financial contracts, in turn, determine the competitive strategies of firms in the product market. Firms compete in prices for market shares. In addition to that, firms invest in R&D in order to induce product or process innovation. We show that better access to financial resources improves a firm's market position and leads to a higher rate of innovation. Cash-rich firms may even decide to prey upon financially restricted rivals in order to prevent new market entry or to induce market exit.
Industrial organization considers strategic behavior of firms in the product market. Firms compete in prices and invest in innovation activities in order to gain market shares. In this book I will investigate the financial decisions of innovative firms if financial markets are imperfect due to asymmetric information. I will demonstrate how financial market imperfections interact with strategic competition of firms in the product market. The tool to analyze these strategic interactions is non cooperative game theory. This book was written while I was assistant professor at the department of economic theory at the University of Tlibingen. I wish to thank my supervisor Manfred Stadler for having suggested this interesting research subject. He introduced me to the exciting field of industrial organization and the economics of information. As my supervisor, he gave me great freedom to pursue my research. I would like to thank my colleagues Jiirgen Volkert, Andreas Scheuerle, Stephan Hornig, RUdiger Wapler and Leslie Neubecker for the nice and friendly atmosphere at our office. Katharina Wichert, Frank Breitling, Andrea Schrage, Stephan Gobel, Christina Schumacher, Alexandra Zaby, Tina Bach-Adetunji and Vanessa Steinmeier provided valuable research assistance. I am grateful to Werner Neus for being my second supervisor. He showed me that the department of banking and business administration and the department of economic theory share common views on financial markets under asymmetric information.
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