Why Leverage Affects Pricing

Stomper, Alex; Zulehner, Christine; Pichler, Pegaret

doi:10.2139/ssrn.966388

Why Leverage Affects Pricing

42 Pages Posted: 3 Mar 2007

See all articles by Alex Stomper

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)

Pegaret Pichler

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

There are 2 versions of this paper

Date Written: December 15, 2006

Abstract

We explain and provide evidence of effects of leverage on pricing. Our model identifies two interacting effects: firms set higher prices (under-invest in market share) if they have more debt, but engage in dynamic risk-shifting by setting lower prices (over-invest in market share) just prior to an increase in debt obligations. The debt maturity structure determines whether these effects counteract or reinforce each other. We provide empirical evidence of both effects using a unique data set of owner-managed hotels in Austrian ski resorts.

Keywords: capital structure, limited liability, debt maturity, pricing policy, hotel industry

JEL Classification: D43, G31, L83

Suggested Citation: Suggested Citation

Stomper, Alex and Zulehner, Christine and Pichler, Pegaret, Why Leverage Affects Pricing (December 15, 2006). Available at SSRN: https://ssrn.com/abstract=966388 or http://dx.doi.org/10.2139/ssrn.966388