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

J. Anthony Cookson

Journal of Financial Economics, 2017, vol. 123, issue 2, 292-312

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 Stock market reactions to withdrawn plans imply that effective preemption increases incumbent firm value by 5%.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.

Keywords: Leverage; Entry threats; Preemption; Financial constraints; Casino industry (search for similar items in EconPapers)
JEL-codes: G31 L13 L83 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:123:y:2017:i:2:p:292-312

DOI: 10.1016/j.jfineco.2016.11.005

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