CentER

Miguel Rosellsn Cifuentes

Abstract:
This dissertation consists of two parts. The first part analyses how liquidation values can play a significant role in some classical topics in financial economics. In particular, we integrate the liquidation value - the value a firm, or a part of it, can reach in the market if its current owners decide to sell it off - in a model of a competitive industry, an oligopoly and in a model of managerial compensation. In the first case, the focus is on capital structure, and we explore how firms with different liquidation values will adopt different debt levels.

The second model deals with entry and pre-emption. We show that a firm may willingly adopt a technology with a potentially high liquidation cost - i.e. with a low liquidation value - because that commits it to stay in the market after bad performance (because it reduces the value of its option to exit), thereby preventing its rival from engaging in predatory practices. Finally, we investigate the incentives of managers to liquidate inefficient divisions. We show that if liquidation conveys negative information about managerial performance, managers will be reluctant to liquidate, and it may not be possible to design any compensation contract that induces them to follow the efficient decision. The second part of this dissertation is an empirical investigation into the influence of product market competition on capital structure. We analyse firms competing in large markets, in dominated markets and in strategic markets (price and quantity competition). We find that small firms with a dominant rival tend to have lower debt levels than small firms in large industries, and that the type of strategic interaction also affects capital structure as predicted by theory.