Threat of Entry and Debt Maturity: Evidence from Airlines

63 Pages Posted: 8 Apr 2016

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

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 increases dramatically. I find that when strategic routes are threatened, incumbents significantly increase debt maturity before entry occurs. Overall, the main findings suggest that airlines respond to entry threats trading off financial flexibility 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 (April 2016). BIS Working Paper No. 556, Available at SSRN: https://ssrn.com/abstract=2758708

Gianpaolo Parise (Contact Author)

EDHEC Business School and CEPR ( email )

393 Promenade des Anglais
Nice, 06200
France

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