Journal article
Product Market Efficiency: The Bright Side of Myopic, Uninformed, and Passive External Finance
Management science, Vol.58(11), pp.2019-2036
11/01/2012
DOI: 10.1287/mnsc.1120.1534
Abstract
We model the effect of external financing on a firm's ability to maintain a reputation for high-quality production. Producing high quality is first best. Defecting to low quality is tempting because it lowers current costs while revenue remains unchanged because consumers and outside investors cannot immediately observe the defection. However, defection to low quality impairs the firm's reputation, which lowers cash flows and inhibits production over the long term. Financing via short-term claims discourages defection to low quality because the gains from defection are mostly captured by outside investors through an increase in the value of their claims. Therefore, if the firm relies on short-term external financing, it is more likely to produce over the long run, produce high-quality goods, and enjoy high profitability. The aggregate results from a laboratory experiment generally accord with these predictions.
Details
- Title: Subtitle
- Product Market Efficiency: The Bright Side of Myopic, Uninformed, and Passive External Finance
- Creators
- Thomas H. Noe - University of OxfordMichael J. Rebello - The University of Texas at DallasThomas A. Rietz - University of Iowa
- Resource Type
- Journal article
- Publication Details
- Management science, Vol.58(11), pp.2019-2036
- Publisher
- Informs
- DOI
- 10.1287/mnsc.1120.1534
- ISSN
- 0025-1909
- eISSN
- 1526-5501
- Number of pages
- 18
- Grant note
- University of Oxford
- Language
- English
- Date published
- 11/01/2012
- Academic Unit
- Finance
- Record Identifier
- 9984380547702771
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