E-Finance, Entry Deterrence, and Optimal Loan Rate of a Potential Entrant: An Option-Based Valuation

This paper examines the relationships among electronic finance (e-finance), entry deterrence, and the potential entrant's optimal loan interest rate in a two-stage model where the sunk costs are the entry barriers. The two key findings are: (i) in the loan rate determination stage, the potential entrant's loan rate is negatively related to its involvement level in e-finance with its own strategic substitutes, to the incumbent's involvement level in e-finance in realization of a more risky state of the world, and to the degree of contestability in realization of a less risky state and (ii) in the technology choice stage, the potential entrant's involvement level in e-finance is positively related to the incumbent's own strategic complements, and to the degree of contestability in realization of a more risky state. The results suggest that a potential entrant's banking investment depends on strong strategic management practices and the realization of risky states of the world.