Risky Preemptive Investment

57 Pages Posted: 20 Mar 2017 Last revised: 27 Jan 2024

See all articles by Limin Fang

Limin Fang

University of British Columbia

Nathan Yang

Cornell University; Cornell SC Johnson College of Business

Date Written: July 19, 2024

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

Suggested Citation

Fang, Limin and Yang, Nathan, Risky Preemptive Investment (July 19, 2024). Available at SSRN: https://ssrn.com/abstract=2936192 or http://dx.doi.org/10.2139/ssrn.2936192

Limin Fang

University of British Columbia ( email )

2053 Main Mall
Vancouver, British Columbia V6T1Z2
Canada

HOME PAGE: http://https://sites.google.com/site/fangliminecon/home

Nathan Yang (Contact Author)

Cornell University ( email )

Dyson School, Warren Hall
360E
Ithaca, NY 14853-6201
United States
6072551590 (Phone)

HOME PAGE: http://dyson.cornell.edu/faculty-research/faculty/ncy6/

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

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