Interactions between Preemptive Competition and a Financing Constraint

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.

Effects of Temporary Regulation of Asymmetric Access Charges in Telecommunications

“…Because the competitive market environment between the two firms is then completely symmetric , each firm enters the market with a probability of one‐half. This finding is the same as in Nishihara and Shibata ().…”

Investment timing under debt issuance constraint

“…Milne and Robertson (1996), Boyle and Guthrie (2003), Hirth and Uhrig-Homburg (2010), and Nishihara and Shibata (2010) examine the interaction between investment and the financing constraint. However, these papers focus on the internal financing constraint.…”

Investment timing with fixed and proportional costs of external financing

“…Milne and Robertson (1996) showed that the investment level increases with cash holdings in a dynamic dividend and investment model. In the real options literature, Hirth and Uhrig-Homburg (2010a) and Nishihara and Shibata (2010) also showed that the investment threshold decreases with internal funds. 4.…”

“…Similar results are seen in the real options literature. Nishihara and Shibata (2010) showed that a firm delays investment when it must rely more heavily on debt financing than the optimal level of the leverage. Hirth and Uhrig-Homburg (2010a) showed that the investment threshold is a decreasing function of the firm's liquid funds.…”