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Predation Due to Bargaining Power Difference in Financial Contracting

Chan, Kwok Ho and Lu, Zhou and Fung, Ka Wai Terence (2013): Predation Due to Bargaining Power Difference in Financial Contracting.

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Abstract

Previous literature presented a predation model based on agency problems in financial contracting. In that model, predation reduced prey’s cash flow through breaking the relationship between the prey and its investors as the prey is financially constrained. This paper presents a different model in which both the predator and the prey are financially constrained and in need of external funding. The only dissimilarity between the predator and the prey is their corresponding level of bargaining power in financial contracting over their respective investors. The asymmetry of bargaining power is the unique source of predatory behavior. Financial contract between firm with less bargaining power (prey) and its investor can deter predation if the predator cannot renegotiate the contract with its own investor. If renegotiation is available for the predator, no financial contract can successfully deter predation.

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