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Investment Decisions and Financial Leverage under a Potential Entry Threat

Author

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  • Shinsuke Kamoto

    (Kagawa University)

Abstract

This study examines investment and financing decisions of a pioneering firm and agency costs of debt in the presence of an entry threat by a potential competitor. It demonstrates that the over-investment problem demonstrated by Mauer and Sarkar (2005) remains in the presence of the potential entry threat. In addition, it demonstrates that when the pioneering firm increases leverage, a potential competitor expedites its market entry. Furthermore, high leverage creates the potential for inducing the competitor to enter the market in a downturn and exposing the pioneering firm to a risk of forced bankruptcy. Therefore, the potential entry threat hinders the pioneering firm from debt financing, and thus mitigates agency conflicts between shareholders and bondholders over investment decisions.

Suggested Citation

  • Shinsuke Kamoto, 2018. "Investment Decisions and Financial Leverage under a Potential Entry Threat," Proceedings of Business and Management Conferences 6810167, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:ibmpro:6810167
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    File URL: https://iises.net/proceedings/8th-business-management-conference-venice/table-of-content/detail?cid=68&iid=008&rid=10167
    File Function: First version, 2018
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    More about this item

    Keywords

    Investment; leverage; Agency costs; Entry threats; Real options;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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