Interactions between Preemptive Competition and a Financing Constraint

Michi Nishihara and Takashi Shibata ()

Journal of Economics & Management Strategy, 2010, vol. 19, issue 4, 1013-1042

Abstract: We develop an investment and financing model in which two identical firms compete for first‐mover advantage in an opportunity to invest. We investigate the interactions between preemptive competition and a financing constraint. We show that a medium‐intensity financing constraint can play a positive role in mitigating the preemptive competition and improving firm value in equilibrium. This positive effect is in sharp contrast with the conventional negative effects of the financing constraint. The positive effect is strong, especially for IT venture businesses because of the following characteristics: severe preemptive competition, a lack of internal funds, high uncertainty regarding future project value, and high bankruptcy costs.

Date: 2010
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https://doi.org/10.1111/j.1530-9134.2010.00276.x

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