This study demonstrates that, apart from managerial agency problem, shareholders' intolerance of failure also deteriorates managerial innovation incentives in public firms. Furthermore, management buyouts improve the innovation intensity, even if managers gain no excess value from the buyouts in collaboration with private equity firms. The study provides insights into the interrelation between firms' innovation, corporate governance, and dividend policy. It presents a rationale behind empirical evidence of a positive relationship between management buyouts and innovation intensity. It provides empirical implications on firms' characteristics that facilitate management buyouts and the return and risk structure of private equity firms.

This study examines investment and financing decisions for a pioneering firm and agency costs of debt in the presence of a potential competitor’s entry threat. It demonstrates that the pioneer’s high leverage induces the competitor to enter the market in a downturn and creates exposure to the risk of forced bankruptcy, apart from expediting its market entry in an upturn. Therefore, the potential entry threat hinders the pioneer from debt financing, and thus mitigates agency conflicts between shareholders and bondholders due to straining shareholders’ self-interest to expedite investment decisions at bondholders’ expense. As Mauer and Sarkar (2005) show that debt financing creates the overinvestment problem to expedite investment decisions in the absence of a potential entry threat, it remains in its presence. The results also provide empirical implications for the relationships among potential entry threats, debt financing, and investment decisions in uncertain nascent industries.