Preemption, leverage, and financing constraints
AbstractThis 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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Bibliographic InfoPaper 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.
Length: 36 pages
Date of creation: Apr 2013
Date of revision:
Preemption; duopoly; capital structure; financing constraints; real options.;
Find related papers by JEL classification:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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