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Investment decisions and financial leverage under a potential entry threat

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  • Kamoto, Shinsuke

Abstract

This study examines investment and financing decisions for a pioneering firm and agency costs of debt in the presence of a potential competitor’s entry threat. It demonstrates that the pioneer’s high leverage induces the competitor to enter the market in a downturn and creates exposure to the risk of forced bankruptcy, apart from expediting its market entry in an upturn. Therefore, the potential entry threat hinders the pioneer from debt financing, and thus mitigates agency conflicts between shareholders and bondholders due to straining shareholders’ self-interest to expedite investment decisions at bondholders’ expense. As Mauer and Sarkar (2005) show that debt financing creates the overinvestment problem to expedite investment decisions in the absence of a potential entry threat, it remains in its presence. The results also provide empirical implications for the relationships among potential entry threats, debt financing, and investment decisions in uncertain nascent industries.

Suggested Citation

  • Kamoto, Shinsuke, 2023. "Investment decisions and financial leverage under a potential entry threat," Journal of Banking & Finance, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:jbfina:v:154:y:2023:i:c:s0378426623001498
    DOI: 10.1016/j.jbankfin.2023.106944
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    References listed on IDEAS

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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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