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Irreversible Investment, Financial Constraints, and Asymmetric Competition

Irreversible Investment, Financial Constraints, and Asymmetric Competition. Discussant: Yanzhi Wang Department of Finance National Taiwan University. Main findings.

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Irreversible Investment, Financial Constraints, and Asymmetric Competition

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  1. Irreversible Investment, Financial Constraints, and AsymmetricCompetition Discussant: Yanzhi Wang Department of Finance National Taiwan University

  2. Main findings • This paper extends Boyle and Guthrie (2003) to investigate the interdependent effects of asymmetric financing constraints and investment costs on investment timing decisions in a duopoly with first-mover advantage. • Three main findings are: • First, with a large cost disadvantage the less-constrained firm can still be the leader when the risk of future funding shortfalls is relatively high. • Second, a weaker firm that is significantly more constrained with a small cost disadvantage can even be the leader under some degree of the risk of future funding shortfalls. • Finally, higher project value volatility can make the firm’s role change from a follower to a leader, thereby lowering the firm’s optimal investment trigger. • This paper is interesting. Story and implication make sense to me!

  3. Game structure • Theoretical training was almost 10 years ago to me, my comments could be not to the point. • This paper starts the structure from -1< qF < qL <0, meaning a quantitative competition in a duopoly. Before we set a leader-follower strcuture, will Cournot setting obtains this inequality: -1< qF < qL <0? • Now we go back to the paper assumption, a leader-follower structure, which is something like a Stackelberg model. So I will use Stackelberg model for following discussions.

  4. Game structure • In traditional Stackelberg setting, leader and follower are by given. Yet now you generalize two players to have choice on being a leader or a follower. If firm i decides not to be a leader, then you means which of following cases? • Firm i is a follower and firm j is a leader, or • Firms i and j are under a Cournot equilibrium? • If firm i will not be a leader, and firm j will be the leader, then will firm j be satisfied to be a leader? If it won’t be to a leader, then both firms will move back to a Cournot case.

  5. Demand function setting • What is your demand function? In a single firm, we can assume all decisions are price-given, so the demand function form does not matter at all in Boyle and Guthrie (2003). • But in a duopoly setting, function form may change your results. It is plausible you set a linear function, will a constant elastic demand function (Q=a/P) change your result? Since you are using a numerical analysis, it should be fine to use a more generalized demand function.

  6. Empirical implication • What is investment here? • In general financial constraint papers, they look at the capital expenditure of a firm. • Yet, who will be a leader in a duopoly market? It must be the one that went public or was founded earlier.

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