Does Capital Structure Differently Affect Incumbents’ Responses to Entry Threat and Actual Entry?

72 Pages Posted: 22 Sep 2016 Last revised: 4 Apr 2019

See all articles by Chao Ma

Chao Ma

WISE & SOE, Xiamen University

Date Written: January 2019

Abstract

Some theories predict that firms with higher financial leverage compete more aggressively in product markets than firms with lower financial leverage, whereas others predict that lower-leverage firms compete more aggressively than higher-leverage firms. This paper studies how incumbent airlines’ capital structure affects their responses to Southwest Airlines’ entry threat and actual entry. The results indicate that, when responding to entry threat, lower-leverage incumbents cut prices more aggressively than higher-leverage incumbents; in contrast, when responding to actual entry, higher-leverage incumbents cut prices more aggressively than lower-leverage incumbents.

Keywords: Capital Structure, Product Market Competition, Response to Entry, Entry Threat, Entry Deterrence, Airlines

JEL Classification: L1, G3

Suggested Citation

Ma, Chao, Does Capital Structure Differently Affect Incumbents’ Responses to Entry Threat and Actual Entry? (January 2019). Available at SSRN: https://ssrn.com/abstract=2841762 or http://dx.doi.org/10.2139/ssrn.2841762

Chao Ma (Contact Author)

WISE & SOE, Xiamen University ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

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