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Capital markets constrain industry scale

Jean-Baptiste, Eslyn L.; Riordan, Michael H.

The paper considers an industry featuring agency problems between outside investors and entrepreneurs who manage the firms comprising the industry. In a range of circumstances, industry scale is independent of product market structure, and is determined solely by the amount of equity financing contributed by the entrepreneurs, and by the capital market's response to possible managerial malfeasance. Thus, in the face of capital market constraints, a change in product-market concentration has no effect on market performance unless it occasions a change in the amount of inside equity financing.

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Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 0304-05
Published Here
March 24, 2011

Notes

October 2003

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