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Leverage and strategic preemption: Lessons from entry plans and incumbent investments

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  • Cookson, J. Anthony

Abstract

This paper empirically investigates the effect of leverage on strategic preemption. Using new data on entry plans and incumbent investments from the American casino industry, I find that high leverage prevents incumbents from responding to entry threats. Facing the same set of entry plans, low-leverage incumbents expand physical capacity (by 30%), whereas high-leverage incumbents do not. This difference in investment matters because capacity installations preempt eventual entry. Stock market reactions to withdrawn plans imply that effective preemption increases incumbent firm value by 5%. My findings suggest that leverage matters for industry composition, not just firm-level investment.

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  • Cookson, J. Anthony, 2017. "Leverage and strategic preemption: Lessons from entry plans and incumbent investments," Journal of Financial Economics, Elsevier, vol. 123(2), pages 292-312.
    • Handle: RePEc:eee:jfinec:v:123:y:2017:i:2:p:292-312
    DOI: 10.1016/j.jfineco.2016.11.005
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    Cited by:

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    3. Sertsios, Giorgo, 2020. "Corporate finance, industrial organization, and organizational economics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    4. J. Anthony Cookson, 2018. "Anticipated Entry and Entry Deterrence: Evidence from the American Casino Industry," Management Science, INFORMS, vol. 64(5), pages 2325-2344, May.
    5. Parise, Gianpaolo, 2018. "Threat of entry and debt maturity: Evidence from airlines," Journal of Financial Economics, Elsevier, vol. 127(2), pages 226-247.
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    8. Cookson, J. Anthony, 2018. "When saving is gambling," Journal of Financial Economics, Elsevier, vol. 129(1), pages 24-45.
    9. Tat Dat Bui & Mohd Helmi Ali & Feng Ming Tsai & Mohammad Iranmanesh & Ming-Lang Tseng & Ming K Lim, 2020. "Challenges and Trends in Sustainable Corporate Finance: A Bibliometric Systematic Review," JRFM, MDPI, vol. 13(11), pages 1-26, October.
    10. Hu, Xiaoxue & Li, Dongxu, 2022. "Do horizontal mergers affect rivals’ cash holdings?," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 275-298.
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    More about this item

    Keywords

    Leverage; Entry threats; Preemption; Financial constraints; Casino industry;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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