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E-Finance, Entry Deterrence, and Optimal Loan Rate of a Potential Entrant: An Option-Based Valuation

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  • Chuen-Ping Chang

    (Graduate Institute of Commerce, Kaohsiung University of Applied Sciences, 415 Chien Kung Road, Kaohsiung 807, Taiwan)

Abstract

This paper examines the relationships among electronic finance (e-finance), entry deterrence, and the potential entrant's optimal loan interest rate in a two-stage model where the sunk costs are the entry barriers. The two key findings are: (i) in the loan rate determination stage, the potential entrant's loan rate is negatively related to its involvement level in e-finance with its own strategic substitutes, to the incumbent's involvement level in e-finance in realization of a more risky state of the world, and to the degree of contestability in realization of a less risky state and (ii) in the technology choice stage, the potential entrant's involvement level in e-finance is positively related to the incumbent's own strategic complements, and to the degree of contestability in realization of a more risky state. The results suggest that a potential entrant's banking investment depends on strong strategic management practices and the realization of risky states of the world.

Suggested Citation

  • Chuen-Ping Chang, 2010. "E-Finance, Entry Deterrence, and Optimal Loan Rate of a Potential Entrant: An Option-Based Valuation," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(02), pages 287-307.
    • Handle: RePEc:wsi:rpbfmp:v:13:y:2010:i:02:n:s0219091510001950
    DOI: 10.1142/S0219091510001950
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    Cited by:

    1. Lin Tian & Liang Han, 2019. "How local is local? Evidence from bank competition and corporate innovation in U.S," Review of Quantitative Finance and Accounting, Springer, vol. 52(1), pages 289-324, January.

    More about this item

    Keywords

    e-finance; entry deterrence; loan rate; capital regulation;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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