Why Leverage Affects Pricing

Pichler, Pegaret; Stomper, Alex; Zulehner, Christine

doi:hhn048

Why Leverage Affects Pricing

The Review of Financial Studies, Vol. 21, Issue 4, pp. 1733-1765, 2008

Posted: 8 Aug 2008

See all articles by Pegaret Pichler

Pegaret Pichler

Northeastern University, D’Amore-McKim School of Business, Finance Area

Alex Stomper

Humboldt University of Berlin - School of Business and Economics

Christine Zulehner

University of Vienna - Faculty of Business, Economics, and Statistics; Télécom Paris; Austrian Institute of Economic Research (WIFO); Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: July 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.

Keywords: D43, G31, L83

Suggested Citation: Suggested Citation

Pichler, Pegaret and Stomper, Alex and Zulehner, Christine, Why Leverage Affects Pricing (July 2008). The Review of Financial Studies, Vol. 21, Issue 4, pp. 1733-1765, 2008, Available at SSRN: https://ssrn.com/abstract=1212069 or http://dx.doi.org/hhn048