Real options in strategic investment games between two asymmetric firms

Kong, Jean; Kwok, Yue Kuen

doi:10.1016/j.ejor.2006.07.006

Cited by 71 publications

(28 citation statements)

References 4 publications

(7 reference statements)

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“…8 By the discussion in footnote 8, we can interpret that the levered firm invests first with probability 1. 7 Let (T 1 , c 1 , T 2 , c 2 ) denote (the levered firm's strategy, the unlevered firm's strategy).…”

Section: After the Levered Firm's Bankruptcy The Unlevered Firm Invementioning

confidence: 98%

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Strategic investment with debt financing

Nishihara

Sawada

2010

International Journal of Management Science and Engineering Man

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This paper investigates firm values and investment strategies (investment, coupon, and default timing) when several firms make strategic real investments with debt financing. We derive and compare the equilibrium investment strategies in three types of duopoly: (i) two symmetric firms, both of which can issue debt, (ii) two symmetric firms, only one of which (the leader) can issue debt, and (iii) a levered firm versus an unlevered firm. We show that in (iii) and in equilibrium, the levered firm always invests prior to the unlevered firm. Further, we derive the equilibrium in the competitive situation of n levered firms, and show that social loss increases as the number of the firms, n, becomes larger.

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Section: After the Levered Firm's Bankruptcy The Unlevered Firm Invementioning

confidence: 98%

“…As explained in Huisman (2001) [7] and Kong and Kwok (2007) [8], three types of equilibrium may arise, namely preemptive, dominant leader-type, and joint investment-type. In (a) in Proposition 3 the preemptive equilibrium occurs.…”

Section: Propositionmentioning

confidence: 99%

Strategic investment with debt financing

Nishihara

Sawada

2010

International Journal of Management Science and Engineering Man

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“…In the project investment decision-making process, enterprises must take into account the market structure, market conditions, investment decisions of competitors etc.. and then make a scientific decision on different market structures and a situation of competitors (Amram, Kulatilaka 1998). At present, the option game theory has been v«dely used in R&D investment decision-making (Shackleton et al 2004;Doraszelski 2004), real estate development (Grenadier 2005;Wang, Zhou 2006), business valuation (Kong, Kwok 2007;Smit, Trigeorgis 2006) and many other fields.…”

Section: Problem Analysismentioning

confidence: 99%

Non-Competition Guaranteed Value and Effect on the Toll Road Project / Bekonkurencinės Vertės Ir Jų Įtaka Mokamosios Automagistralės Projektui / Инвестиционная Ценность, Обеспечивающая Неконкурентность, И Ее Влияние На Проект Платной Автомагистрали

et al. 2011

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A non-competition guarantee has been widely used for financing the toll road project. However, to our best knowledge, there seems to be no research about the value and incentive effect of the non-competition guarantee. In the competitive and non-competitive condition respectively, this paper constructs the models of investment value and investment threshold by adopting the option game theory and measurement approach. The results of theory derivation indicate that the non-competition guarantee plays a strong role in investment incentives by reducing investment threshold. The simulation results indicate that the non-guaranteed value increases as the expected growth rate of traffic flow increases, and decreases as volatility increases.

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“…For instance, customers accustomed to the leader's service might prefer the leader's brand to the follower's brand, even if the follower's product is of the same quality. This sort of asymmetric case is also treated in Lambrecht (2001) and Kong and Kwok (2007).…”

Section: Numerical Analysis and Implicationsmentioning

confidence: 99%

Preemption, leverage, and financing constraints

Nishihara

Sawada

2013

Rev Financ Econ

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This paper investigates the interactions between preemptive competition and leverage in a duopoly market. We investigate both a case in which the firms have optimal financial structures, and a case in which financing constraints require firms to finance their investments by debt. Our findings are that the second mover always leaves the duopoly market before the leader, although the leader may exit before the follower's entry. The leverage effects of debt financing can increase the value of a firm and accelerate investment, even in the presence of preemptive competition. Notably, financing constraints can delay preemptive investment and improve firm values in preemptive equilibrium. Indeed, the leader's high leverage due to financing constraints can lower the first‐mover advantage and weaken preemptive competition. Especially with strong first‐mover advantage, the financing constraint effects can dominate the leverage effects. These findings are almost consistent with the empirical evidence, which shows that high leverage leads to competitive disadvantage and mitigates product market competition.

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Real options in strategic investment games between two asymmetric firms

Cited by 71 publications

References 4 publications

Strategic investment with debt financing

Strategic investment with debt financing

Preemption, leverage, and financing constraints

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