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Money as a weapon: Financing a winner-take-all competition

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  • Banerji, Sanjay
  • Fang, Dawei

Abstract

We investigate the capital structure of pioneering startup firms, which are frequently credited with opening new markets and niches in the digital era and often face the threat of the potential entry of successful, cash-rich firms from adjacent markets. Our analysis is made in the context of a winner-take-all competition in the form of an all-pay auction for the monopolistic position in a new market. We show that a pioneer's optimal capital structure exhibits widespread diversity and is determined by a tradeoff between entry deterrence and post-entry competition intensification. A pure-equity (a mixture of equity and risky debt) structure is optimal when (1) barriers to entry are small (large), (2) the future prospect of the new market is fairly certain and/or, (3) the new market is likely (unlikely) to create large externalities on the potential entrant's existing business. The post-entry competition is likely to engender large losses to both the winner and the loser.

Suggested Citation

  • Banerji, Sanjay & Fang, Dawei, 2021. "Money as a weapon: Financing a winner-take-all competition," Journal of Corporate Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:corfin:v:66:y:2021:i:c:s0929119920302273
    DOI: 10.1016/j.jcorpfin.2020.101783
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    References listed on IDEAS

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    More about this item

    Keywords

    All-pay auction; Capital structure; Financial constraint; Winner-take-all market;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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