Leverage and Strategic Preemption: Lessons from Entry Plans and Incumbent Investments

57 Pages Posted: 14 Jun 2014 Last revised: 3 Feb 2017

J. Anthony Cookson

University of Colorado at Boulder - Leeds School of Business

Date Written: December 28, 2015

Abstract

This paper empirically investigates the effect of leverage on strategic preemption. Using new data on entry plans and incumbent investments from the American casino industry, I find that high leverage prevents incumbents from responding to entry threats. Facing the same set of entry plans, low leverage incumbents expand physical capacity by 30 percent, whereas high leverage incumbents do not. This difference in investment matters because capacity installations preempt eventual entry. Indeed, stock market reactions to withdrawn plans imply effective preemption increases incumbent firm value by 5 percent. My findings suggest that leverage matters for industry composition, not just firm-level investment.

Keywords: leverage, strategic preemption, casino industry

JEL Classification: G31, G32, L13, L83

Suggested Citation

Cookson, J. Anthony, Leverage and Strategic Preemption: Lessons from Entry Plans and Incumbent Investments (December 28, 2015). Journal of Financial Economics (JFE), Vol. 123, No. 2 (February 2017), Pages 292-312.. Available at SSRN: https://ssrn.com/abstract=2449562 or http://dx.doi.org/10.2139/ssrn.2449562

J. Anthony Cookson (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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