Why Leverage Affects Pricing

We explain and provide evidence for effects of leverage on pricing. Our model identifies two effects that either counteract or reinforce each other, depending on the debt maturity structure: (i) firms set higher prices (underinvest in market share) if they have more debt, and (ii) firms engage in dy...

Full description

Saved in:

Bibliographic Details
Published in:	The Review of financial studies 2008-07, Vol.21 (4), p.1733-1765
Main Authors:	Pichler, Pegaret, Stomper, Alex, Zulehner, Christine
Format:	Article
Language:	eng
Subjects:	Asset pricing Austria Capital structure Corporate finance Customer bases Debt Debt management Default Discount rates Economic theory Financial engineering Financial leverage Fixed costs Hotels Hotels & motels Incentives Leverage Liability Market shares Mathematical models Prices Pricing Pricing policies Proxy reporting Proxy statements Securities prices Short term debt Skis Studies
Online Access:	Get full text
Tags:	Add Tag No Tags, Be the first to tag this record!

Description
Summary:	We explain and provide evidence for effects of leverage on pricing. Our model identifies two effects that either counteract or reinforce each other, depending on the debt maturity structure: (i) firms set higher prices (underinvest in market share) if they have more debt, and (ii) firms engage in dynamic risk-shifting by setting lower (higher) prices if the current debt obligation will be higher (lower) in the next period than in the present period. Using a unique dataset of owner-managed hotels in Austrian ski resorts, we provide empirical evidence of both effects.
ISSN:	0893-9454 1465-7368