Networking as a Barrier to Entry and the Competitive Supply of Venture Capital

We examine whether strong networks among incumbent venture capitalists (VCs) in local markets help restrict entry by outside VCs, thus improving incumbents' bargaining power over entrepreneurs. More densely networked markets experience less entry, with a one‐standard deviation increase in network ties among incumbents reducing entry by approximately one‐third. Entrants with established ties to target‐market incumbents appear able to overcome this barrier to entry; in turn, incumbents react strategically to an increased threat of entry by freezing out any incumbents who facilitate entry into their market. Incumbents appear to benefit from reduced entry by paying lower prices for their deals.     

Corporate risk management,product market competition,and disclosure

This paper studies the effects of hedge disclosure requirements on corporate risk management and product market competition. The analysis is based on a model of market entry and shows that to prevent entry incumbent firms engage in risk management when these activities remain unobserved by outsiders. In the resulting equilibrium, financial markets are well informed and entry is efficient. However, potential attempts for more transparency by additional disclosure requirements introduce a commitment device that provides incumbents with incentives to distort risk management activities thereby influencing entrant beliefs. In equilibrium, firms engage in significant risk-taking. This behavior limits entry and adversely affects the nature of competition in industries.     

Peer-level analyst transitions

This study examines the effect of peer-level analyst transitions (i.e., switching between brokerage houses) on associated regular incumbent analysts' forecasting performance. We employ a difference-in-differences research design with analyst fixed effects and compare incumbent analysts of different groups within the same broker and same time periods. We find that incumbents who cover at least one common industry as the transiting analyst (i.e., affected incumbents) issue more accurate and timely forecasts after a transiting analyst arrives than incumbents who cover different industries (i.e., unaffected incumbents). Further, affected incumbents issue less accurate forecasts after a transiting analyst leaves than do unaffected incumbents. We also examine potential mechanisms of knowledge spillover and find some evidence that the effect is more salient when the transiting analyst switches from a larger brokerage house, has greater industry scope, or covers geographically linked firms.     

Risk management,nonlinearity and aggressiveness in monetary policy: The case of the US Fed

We contribute to the empirical literature on the risk-management approach to monetary policy by estimating regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets. Using quarterly data for the Greenspan period we find that: (i) risk in the inflation outlook and in financial markets are a more powerful driver of monetary policy regime changes than variables typically suggested in the literature, such as the level of inflation and the output gap; (ii) estimation of regime switching models shows that the response of the US Fed to the inflation outlook is invariant across policy regimes; (iii) however, in periods of high economic risk monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances; and (iv) the US Fed is estimated to have responded aggressively to the output gap in the late 1980s and beginning of the 1990s, and in the late 1990s and early 2000s. These results are consistent with Mishkin (2008)’s view that in periods of high economic risk monetary authorities should respond aggressively to changes in macroeconomic conditions while the degree of inertia should be lower than in normal circumstances.     

Leverage and strategic preemption: Lessons from entry plans and incumbent investments

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.     

The Bright Side of Internal Capital Markets

We examine capital expenditure decisions of discount firms in response to Wal-Mart's entry into their markets. Before Wal-Mart's entry, focused incumbents and discount divisions of diversified incumbents are similar in size, geographic dispersion, and firm debt levels. However, discount divisions of diversified firms are significantly more productive. After Wal-Mart's entry, diversified firms are quicker to either "exit" the discount business or "stay and fight." Also, their capital expenditures are more sensitive to the productivity of their discount business. Internal capital markets function well, as transfers are away from the worsening discount divisions. It appears diversified firms make better investment decisions.     

Dual class IPOs: A theoretical analysis

We consider an incumbent who wishes to sell equity to outsiders at an IPO to implement his firm’s project. He may be talented (lower cost of effort, comparative advantage in project-implementation) or untalented. The project may have high (intrinsically more valuable, but showing less signs of success in the near-term) or low near-term uncertainty. Under a single class share structure, the incumbent has a greater chance of losing control to potential rivals if he undertakes the project with high near-term uncertainty, since outsiders may vote for the rival if they believe the project is not progressing well. A dual class share structure allows the incumbent to have enough votes to prevail against any rival, but may be misused by untalented incumbents to dissipate value. Our results help to explain firms’ choices between dual class and single class IPOs and the post-IPO operating performance of dual class versus single class firms.     

The Competitive Dynamics of Geographic Deregulation in Banking: Implications for Productive Efficiency

Deregulation of geographic restrictions in banking over the past 20 years has intensified both potential and actual competition in the industry. The accumulating empirical evidence suggests that potential efficiency gains associated with consolidating banks are often not realized. We evaluate the impact of this increased competition on the productive efficiency of non-merging banks confronted with new entry in their local markets and find that the incumbent banks respond by improving cost efficiency. Thus, studies evaluating the impact of bank mergers on the efficiency of the combining parties alone may be overlooking the most significant welfare-enhancing aspect of merger activity.     

The relationship between capital structure and product markets: evidence from New Zealand

The main purpose of this paper is to investigate whether the capital structure of New Zealand firms influences their product-market performance in the period from 1984 to 2008. Our main findings are that the use of leverage by publicly listed New Zealand companies leads to an increase in relative-to-industry sales growth, but a decrease in relative-to-industry return on assets (ROA). We also conduct a reverse causality test by examining whether sales growth and ROA influence leverage. We find no evidence that sales growth has an impact on the use of debt, but significant evidence that ROA is negatively correlated with its use. Our results suggest that New Zealand firms use debt to compete more aggressively in their product markets, even though this strategy comes at a cost of lower relative-to-industry profitability. A possible explanation for this behavior is the more competitive trading environment that has developed in New Zealand over the last 25 years.     

The effect of entry on R&D networks

We investigate the effect of potential entry on the formation and stability of R&D networks considering farsighted firms. The presence of a potential entrant often alters the incentives of incumbents to collaborate. Incumbent firms may form an otherwise undesirable collaboration to deter entry of a new firm. Moreover, an incumbent may refrain from establishing an otherwise desirable collaboration, expecting to form a more profitable link with the entrant. Finally, potential entry may lead an inefficient incumbent to exit the market. Welfare analysis shows market and social incentives to be often misaligned. We propose a subsidy scheme that encourages welfare‐improving entry.     

Entry and capital structure mimicking in concentrated markets: The role of incumbents’ financial disclosures

We examine whether the public availability of product market incumbents' financial disclosures leads to greater capital structure mimicking of incumbents by entrants. Exploiting a change in disclosure enforcement for German private firms in the mid-2000s, we find entrant-incumbent mimicking rises substantially in concentrated markets once incumbents' financial statements are publicly available. Additional tests exploring potential mechanisms are more consistent with interfirm learning underlying the effect than alternative channels. Our findings shed light on the effects of competitor financial statement disclosure on private firms’ initial financing decisions and highlight how capital structure dependencies among peer firms arise.     

Capital structure of Islamic banks: How different are they from conventional banks?

This paper uses comprehensive data for 112 Islamic and 709 conventional banks from 23 countries over 1995–2015 to compare the capital structure of Islamic banks (IBs) and conventional banks (CBs) from several perspectives. We find that IBs and CBs seem to face different cost pressures in the process of adjusting towards the target capital structure. Asset growth is a key driver of capital structure change, and CBs adjust leverage more aggressively in response to changes in total assets compared to IBs, because they have an advantage in obtaining external funds and can achieve leverage adjustments faster and at a low cost. IBs have more regulatory capital, but their ability to respond to risks is weaker than traditional banks. The results of this paper suggest that Islamic banks are in a disadvantaged position compared to CBs in capital structure management. The conclusion suggests that IBs need to expand its financing tools and funding sources to reduce adjustment costs and improve their capability to deal with asset risk.     

The role of firm characteristics in pharmaceutical product launches

I examine the determinants of new pharmaceutical launches since 1980 in G7 nations. Both market and firm characteristics, and their interaction, are important in explaining entry. New drugs are 1.5 times more likely to be launched in markets that share a border or a language of a drug company's country of headquarters. The effect of competition depends on the characteristics of both the potential entrant and incumbents: domestic entrants prefer to compete with domestic incumbents. Despite the potential for licensing and low transportation costs, the match between the innovating firm and market conditions remains an important determinant of entry.     

Foreign Lenders and the Real Sector

We develop a theory of the interaction between the entry of lenders and the real sector. The high liquidation skills of incumbent lenders render them too tough in terminating high-risk/return projects. Being "foreign" to the market, newcomers have lower ability to liquidate than incumbents. This makes them softer in liquidating high-risk/return projects but renders their funding more costly. We show that the entry of lenders and the share of high-risk/return projects can reinforce each other through firms' liquidation values. This interaction dampens the output impact of liquidity shocks. Hence, financial liberalization can enhance stability.     

Stock market reactions to monetary policy surprises under uncertainty

This article investigates how uncertainty impacts the effect of monetary policy surprises on stock returns. Using high-frequency US data, we demonstrate that stock markets respond more aggressively to monetary policy surprises during periods of high uncertainty. We also show that uncertainty asymmetrically influences the transmission of positive and negative monetary policy surprises to stock market prices. The amplifying effect of uncertainty is found to be stronger for expansionary shocks than for contractionary shocks. Our robustness analysis confirms that financial uncertainty has a significant role in shaping the influence of monetary policy on the stock market.     

The deep-pocket effect of internal capital markets

We provide evidence that incumbent and entrant firms' access to business group deep pockets affects the entry patterns in product markets. Relying on a unique French data set on business groups, our paper shows that entry into manufacturing industries is negatively related to the cash hoarded by incumbent affiliated groups and positively related to entrant groups' cash. In line with theoretical predictions, we find that the impact of group cash holdingson entry is more important in environments where financial constraints are pronounced. The cash holdings of incumbent and entrant groups also affect the survival rate of entrants in the three- to five-year post-entry window. Overall, our findings suggest that internal capital markets operate within corporate groups and affect the product market behavior of affiliated firms by mitigating financial constraints.     

Natural disasters and economic growth: The role of banking market structure

Following a natural disaster, the rate of economic growth recovers faster in less competitive banking markets. A 10% reduction in competition increases the rate of economic growth by 0.3%. In less competitive markets, banks respond to a disaster by increasing the supply of real estate credit by refinancing mortgage loans, but do not lend more to businesses or consumers. Instead, government agencies provide disaster loans to affected businesses and households. Smaller, profitable and well-capitalized institutions that rely more on traditional retail banking originate most mortgage credit.     

The Empire strikes back. Counterrevolutionary strategies for industry leaders

Industry leaders frequently worry that their companies will fall victim to some revolutionary business model or disruptive technology. But new research shows that it's strategically better for incumbents to counter a revolution than to ignore or fully embrace it. Successful incumbents rely on one or more of five approaches to restrain, modify, or, if necessary, neutralize a revolutionary threat. A company that perceives a revolution in its earliest stages can use containment strategies. By throwing up roadblocks--raising switching costs, perhaps, or launching discrediting PR efforts--an incumbent can often limit the degree to which customers and competitors accept a nascent insurgency. And, sometimes, revolutions die there. If not, early containment buys a company some time to shape the revolution so that it complements, rather than supersedes, the incumbent's strengths. And even if shaping efforts fail, they can give an industry leader more time to work out how to absorb the threat by bringing the new competencies or technologies inside the firm in such a way that they don't destroy its existing strengths and capabilities. When revolutions have progressed too far to slow them down, incumbents must take a more aggressive tack. Neutralizing strategies meet a revolution head-on and terminate it--by, say, temporarily giving away the benefits offered by the challenger for free. Annulment strategies allow the market leader to leapfrog over or sidestep the threat. These five strategic approaches need not be used in isolation, as a detailed case study of the way Anheuser-Busch countered the craft-beer revolution dramatically demonstrates. Sensible industry leaders do not lead revolutions; they know they may not survive the attempt. Instead, they prefer to lead counterrevolutions.     

Entry,exit, and the determinants of market structure

This article estimates a dynamic, structural model of entry and exit for two US service industries: dentists and chiropractors. Entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short‐run price competition are important determinants of long‐run firm values, firm turnover, and market structure. In the dentist industry entry costs were subsidized in geographic markets designated as Health Professional Shortage Areas (HPSA) and the estimated mean entry cost is 11 percent lower in these markets. Using simulations, we find that entry cost subsidies are less expensive per additional firm than fixed cost subsidies.     

On the strategic use of debt and capacity in rapidly expanding markets

We exploit the 1996 telecommunications deregulation as a quasi-natural experiment to investigate whether incumbents alter debt and capacity tactics when facing new rivals. We find that incumbents increase leverage after deregulation, even when controlling for traditional determinants and market conditions. Consistent with a new post-deregulation benefit, a higher leverage is positively related to market shares. This behavior appears only in telecommunication segments most affected by the deregulation. We find weak evidence for increased use of capacity tactics. Our findings for incumbents facing an influx of rivals in a rapidly expanding market differ from those of earlier studies considering mature markets.