Protective interests and creative destruction [An article from: Journal of Financial Intermediation]

This digital document is a journal article from Journal of Financial Intermediation, published by Elsevier in . The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
We study mechanisms by which the provision of incentives to new entrants is influenced by lenders' financial interests in incumbents. When a financier has a strong interest in protecting incumbent rents, he stifles the entrant's internal efficiency with a highly dilutive claim, and bribes her for not accessing more aggressive finance elsewhere. By contrast, when the financier's protective interest in the incumbent is less strong, then it can spur the destruction of incumbent rents. This is because it strengthens the financier's commitment to penalize the entrant for managerial slack by forcing her into market exit, which sharpens her internal efficiency and competitiveness. While the corresponding decrease in incumbent firm value is partially internalized by the financier, he is more than compensated by the incremental firm value of the entrant, part or all of which accrues to him. The model has implications for the competitive effects of industry-focused lending styles.