Risky Preemptive Investment

Abstract

Our study assesses the extent to which firms are willing to potentially sacrifice in the short-run to make aggressive investments aimed at deterring competitors from entering markets. We develop a dynamic strategic real options investment model for quantifying the relationship between ex ante aggressive investment and ex post survival rates for each investment. Under a retail competition context, we use monthly data about fast casual taco chain establishments in Texas where we observe granular strategic investment decisions across a large number of geographic product markets. With this data and our theoretical framework, we systematically map out specific economic conditions that determine whether aggressive investment comes with a future cost, in the form of increased failure risk (i.e., establishment exit).

Keywords: Dynamic Discrete Choice Models, Entrepreneurship, Firm Investment and Value, Market Power, Product Market Competition, Real Options Theory, Retail Strategy

JEL Classification: G30; G31; L10; L25; L26; L41; L66