Investment Decisions and Financial Leverage under a Potential Entry Threat

Shinsuke Kamoto ()
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Shinsuke Kamoto: Kagawa University

No 6810167, Proceedings of Business and Management Conferences from International Institute of Social and Economic Sciences

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.

Keywords: Investment; leverage; Agency costs; Entry threats; Real options (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2018-10
New Economics Papers: this item is included in nep-cfn
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Published in Proceedings of the Proceedings of the 8th Business & Management Conference, Venice, Oct 2018, pages 104-123

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Persistent link: https://EconPapers.repec.org/RePEc:sek:ibmpro:6810167

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