Faculty of Economics and Business Administration Publications Database

Why leverage affects pricing

Pegaret, Pichler
Stomper, Alexander
Volume: 21
Number: 4
Pages: 1733 - 1765
ISSN-Print: 0893-9454
Link External Source: Online Version
Year: 2008
Abstract: 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.