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Pricing Strategy and Financial Policy

Sudipto Dasgupta1; Sheridan Titman2

1 Hong Kong University of Science and Technology · 2 University of Texas

Review of Financial Studies 1998

Recent empirical evidence indicates that capital structure changes affect pricing strategies. In most cases, prices increase following the implementation of a leveraged buyout of a major firm in an industry, with the more leveraged firm in the industry charging higher prices on average. Notable exceptions exist, however, when the leverage increasing firm's rival is relatively unlevered. The first observation is consistent with a model where firms compete for market share on the basis of price. The second observation can be explained within the context of a Stackelberg model where the relatively unlevered rival acts as the Stackelberg price leader.

DOI
10.1093/rfs/11.4.705
Volume
11 (4)
Pages
705-737
Language
en
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