Preemption, leverage, and financing constraints

Michi Nishihara () and Takashi Shibata ()
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Michi Nishihara: Graduate School of Economics, Osaka University

No 13-05, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

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 follower fs 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 leader fs 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.

Keywords: Preemption; duopoly; capital structure; financing constraints; real options. (search for similar items in EconPapers)
JEL-codes: C73 G31 G33 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013-04
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Preemption, leverage, and financing constraints (2014)
Journal Article: Preemption, leverage, and financing constraints (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:1305

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