Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 123, Issue 2, Pages 292-312Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2016.11.005
Keywords
Leverage; Entry threats; Preemption; Financial constraints; Casino industry
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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%), whereas high-leverage incumbents do not. This difference in investment matters because capacity installations preempt eventual entry. Stock market reactions to withdrawn plans imply that effective preemption increases incumbent firm value by 5%. My findings suggest that leverage matters for industry composition, not just firm-level investment. (C) 2016 Elsevier B.V. All rights reserved.
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