Inaugural lecture celebrates an academic with a fresh take on finance and competition

Giacinta Cestone explored the intricate interplay between finance and product market competition in her inaugural lecture as Professor of Finance at Bayes Business School this week.

Professor Cestone’s speech drew on her extensive research to highlight the advantages of exploring connections between finance, labour economics, industrial organisation, institutions and the economics of law.

“Working in this field has allowed me to see corporate finance and governance from an entirely different angle. It has also made me that person in the finance faculty who is at the intersection between fields: never too good at one thing, but hopefully a useful co-author and a decent advisor, who sees connections between apparently unrelated phenomena.

“I hope I can keep things clear and simple. First, most things that make sense in economics can be explained in simple terms. Secondly, I owe it to my amazing friends from all walks of life who made it here today: some of them work in the City or in Canary Wharf – some of them are proper doctors and art teachers – so thank you for coming today.”

Professor Cestone joined Bayes (then Cass) as a senior lecturer in 2010, having completed her PhD in Economics at the Toulouse School of Economics a decade earlier.

Introducing the lecture, the Bayes Dean, Professor Andre Spicer, paid tribute to “an important member of the school community”, describing her as “a talented researcher and a committed educator”.

“Giacinta’s work on business groups, labour economics and financial contracting has provided a new way of thinking about finance. Her work with our PhD students has helped to foster many emerging researchers in the study and practice of corporate finance.

“She embodies many of the best characteristics of an economist – a rational and inquiring mind, analytical rigour and a commitment to question received wisdom.”

In her lecture, Professor Cestone set out the key lessons from years of research – and collaboration with policymakers – to explain that while finance is often perceived as a background mechanism, it wields significant influence over market competition, corporate strategies and policymaking. Financial and organisational structures shape competitive landscapes, Professor Cestone said, illustrating her point with case studies and research findings.

Finance and Market Entry: The Role of Investors

The relationship between finance and product market rivalry became evident to her in the late 1990s when, as part of her PhD studies, Professor Cestone explored the concept of "foreclosure".

Foreclosure refers to a company preventing competitors from accessing essential tools or assets, with the aim of limiting competition.

"Providing financing to a new entrant is like to offering access to an essential input. Investors’ decisions to fund new entrants are pivotal to fostering competition in any industry."

Working alongside her then colleague Lucy White (now Associate Professor of Finance at Boston University), Professor Cestone’s early research revealed that the nature of financial contracts significantly affects competition.

Their model demonstrated a key insight: when investors hold equity stakes in an established innovator, they are less likely to fund new entrants in the same industry. investors who have committed equity seek to safeguard their initial investment, which usually means they don’t want to enable competitors – so they effectively engage in anticompetitive behaviour. However, this rule does not hold if the investor has debt in the existing market player.

When the paper was published in the Journal of Finance, both Professor Cestone and her co-author secured their first academic roles.

Professor Cestone moved on to explore how the financial strategies of corporate groups – collections of firms operating under a common parent company – influence competition.

"Groups operate internal capital markets, reallocating financial resources across subsidiaries in response to competitive threats," she said.

Professor Cestone and her research partners revealed that firms affiliated with financially robust groups have significant competitive advantages. They are much less likely to exit markets than counterparts who face dominant, well-funded competitors.

“This was based on an important concept in economics: deep pockets (basically, cash holdings and financing capacity) allow a firm to get a competitive edge over rival firms. They have more funding for advertising, R&D and a capacity to sustain price wars, all the stuff that matters for competition.”

This dynamic was vividly illustrated by the General Electric-Honeywell merger, where the European Commission highlighted General Electric's financial strength as a potential tool for market dominance.

Her body of research has profound implications for competition policy.

"Merger appraisals, such as those by the Competition and Markets Authority, must consider the financial strength of corporate groups. For instance, when evaluating a 'failing firm scenario’ – where a merger might be allowed because one firm is on the verge of market exit, it's essential to assess whether the parent company has the resources to sustain the struggling subsidiary.”

This perspective is further underscored by recent labour market research. Corporate groups, Professor Cestone said, manage not just financial but also human capital through internal labour markets. Firms can avoid [employee] dismissal costs by moving employees from a struggling part of a conglomerate to one doing well. Similarly, workers can be moved from one firm to a subsidiary seeking to expand – reducing hiring and training costs. This flexibility offers additional competitive advantages, shielding groups from labour market frictions.

Trade Credit and Competitive Dynamics

Professor Cestone is still a busy researcher, most recently exploring the rise of trade credit – where suppliers extend payment terms to buyers – buyers and its impact on competition.

“There seems to be a consensus in financial economics and among policymakers that long payment terms extended to buyers [by financially strong suppliers] are damaging to financially weaker – usually smaller – suppliers,” she said.

Her research suggests that financially constrained suppliers may actually enjoy a boost to demand.

However, she and her research partners did conclude that trade credit can become anti-competitive when coupled with early payment discounts, which redirect demand away from smaller suppliers who cannot offer similar terms.

Legislators should consider these nuances when drafting policies such as France’s recent cap on the length of trade credit agreements.

A Broader Perspective on Corporate Influence

She concluded by emphasising the broader implications of the research work she has undertaken.

"Corporate finance and governance extend far beyond firm-financier relationships.  From labour and product markets to environmental and societal impacts, finance remains a critical determinant of corporate strategy and market outcomes."