Threat of Entry and Debt Maturity: Evidence from Airlines
58 Pages Posted: 9 Aug 2014 Last revised: 11 Feb 2017
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Threat of Entry and Debt Maturity: Evidence from Airlines
Threat of Entry and Debt Maturity: Evidence from Airlines
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: Suggested Citation
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