In this paper, we study the rational behaviors of firms in responses to the market strategy of financial institutions for higher profits in the steady state-economy. We develop theoretical models about the effects of reputation of the financial instit...
In this paper, we study the rational behaviors of firms in responses to the market strategy of financial institutions for higher profits in the steady state-economy. We develop theoretical models about the effects of reputation of the financial institutions as principals on their own payoffs and the behaviors of agents or firms in a market with various types of firms with different credit history, based on the reputation theory model of Alexeev and Kim (2004), and four types of rationally behaving firms which are to maximize their chance of credit-financing at a cheaper cost over periods, experiencing the decision of financial institutions as a signal about their type to the market. We have found that a financial institution is more likely to provide funds at a higher interest rate in the monopolistic market than in the competitive market, where two financial institutions play opposite strategies in the competitive market and that in the competitive market, a financial institution is more likely to provide funds at a higher interest rate as the competition in the market intensifies. We also could infer that firms financing more from a hard budgeting financial institution at a relatively low cost will have higher stock prices and thus higher firm values, that firms financing more from a softly budgeting financial institution at a relatively higher cost will have lower stock prices and thus lower firm values, and that firms that did not successfully financed from a hard budgeting financial institution might have higher or lower firm values.