Threat of Entry and Debt Maturity: Evidence from Airlines

58 Pages Posted: 9 Aug 2014 Last revised: 11 Feb 2017

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2017

Abstract

I explore the effect of the threat posed by low-cost competitors on debt structure in the airline industry. I use the route network expansion of low-cost airlines to identify routes where the probability of future entry increase dramatically. I find that when a large portion of their market is threatened, incumbents significantly increase debt maturity before entry occurs. Overall, the main findings suggest that airlines respond to entry threats trading off the benefits of short-term financing for lower rollover risk. The results are consistent with models in which firms set their optimal debt structure in the presence of costly rollover failure.

Keywords: Liquidity risk, competition, debt maturity, rollover risk, threat of entry

JEL Classification: G31, G32, D21, D43, L93

Suggested Citation

Parise, Gianpaolo, Threat of Entry and Debt Maturity: Evidence from Airlines (February 1, 2017). Journal of Financial Economics (JFE), Forthcoming, Swiss Finance Institute Research Paper No. 14-39 , Available at SSRN: https://ssrn.com/abstract=2471581 or http://dx.doi.org/10.2139/ssrn.2471581

Gianpaolo Parise (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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