This work was supported by KAKENHI 20710116, 19710126. The authors thank the coeditor and anonymous referees for their helpful comments.
Interactions between Preemptive Competition and a Financing Constraint
Version of Record online: 22 NOV 2010
© 2010 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy
Volume 19, Issue 4, pages 1013–1042, Winter 2010
How to Cite
Nishihara, M. and Shibata, T. (2010), Interactions between Preemptive Competition and a Financing Constraint. Journal of Economics & Management Strategy, 19: 1013–1042. doi: 10.1111/j.1530-9134.2010.00276.x
- Issue online: 22 NOV 2010
- Version of Record online: 22 NOV 2010
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.