Imperfect Competition, Agency, and Financing Decisions

Abstract

We examine in a Cournot duopoly model the well known view that short-term capital market debt can control managerial moral hazard. We show that short-term debt does not provide this discipline because of management's manipulation of the information flow to the market. Shareholders may nevertheless prefer short-term debt because it motivates management to be more aggressive in the product market. We contrast short-term and long-term capital market financing with bank credit that includes monitoring. The empirical implications link managerial agency, predation, and the choice of debt maturity and funding source.

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