Introduction

This chapter again deals with the interactions between industrial firms and the financial sector, but this time the analysis is focused on investments. In particular, it contains a critical discussion on a few theoretical problems raised by introducing, in a standard investment model, the assumption of simultaneity between investment and financial decisions for a firm operating in a ‘non-securitized’ financial system.

Obviously, introducing simultaneity between investments and financial structure dramatically increases the degree of complexity of the investment model. A qualitative discussion introduced with the help of a few simplifying assumptions, borrowed from the literature of finance, reveals some interesting similarities with the macroeconomic literature on ‘excess sensitivity’.

The relevance of the firm's financial structure for investments has been the object of many contributions, both in finance and in industrial economics, although most of them do not raise the problem of simultaneity between investment and financial structure.

In industrial economics, this issue has been analysed – within the context of predatory pricing models – by the literature on the ‘deep pocket argument’ (Telser, 1966; Benoît, 1984; Poitervin, 1989a) and by the literature based on the assumption of ‘limited liability effect’ (Brander and Lewis, 1985; Poitervin, 1989b). In the former, ‘strong’ firms can afford a longlasting price war because they can rely on large financial resources. In the latter, a high level of debt is regarded as a pre-commitment for an aggressive policy: a signalling game of entry deterrence yields, as a result, the optimal financial structure for both the incumbent and the entrant.