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Preemption, leverage, and financing constraints

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  • Michi NISHIHARA

    ()
    (Graduate School of Economics, Osaka University)

  • Takashi SHIBATA

    ()
    (Graduate School of Social Sciences, Tokyo Metropolitan University)

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    Abstract

    This paper investigates the interactions between preemptive competition and leverage. We find that the second mover always leaves the duopoly market before the first mover, although the leader may exit before the followerfs entry. We also see the leverage effects of debt financing increasing firm values and accelerating investment, even in the presence of preemptive competition. In addition to the case with optimal capital structure, we analyze a case with financing constraints that require firms to finance investment costs by debt. Notably, financing constraints can delay preemptive investment and improve firm values in preemptive equilibrium. Indeed, the leaderfs high leverage due to the financing constraints can lower the first-mover advantage and weaken preemptive competition. Especially with strong first-mover advantage, the financing constraint effects can dominate the leverage effects. These findings are almost consistent with empirical evidence that high leverage leads to competitive disadvantage and mitigates product market competition.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1305.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 13-05.

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    Length: 36 pages
    Date of creation: Apr 2013
    Date of revision:
    Handle: RePEc:osk:wpaper:1305

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Related research

    Keywords: Preemption; duopoly; capital structure; financing constraints; real options.;

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