Irreversible Investment, Financial Constraints, and Asymmetric Competition

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 firms role change from a follower to a
  leader, thereby lowering the firms 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 -1lt qF lt qL
  lt0, meaning a quantitative competition in a
  duopoly. Before we set a leader-follower
  strcuture, will Cournot setting obtains this
  inequality -1lt qF lt qL lt0?
• 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 wont 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 (Qa/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.

7
(No Transcript)