Why Leverage Affects Pricing

Pegaret Pichler; Alex Stomper; Christine Zulehner

doi:10.1093/rfs/hhn048

Why Leverage Affects Pricing

Pegaret Pichler¹; Alex Stomper²; Christine Zulehner³

¹ Institut für Höhere Studien - Institute for Advanced Studies (IHS) · ² #N#Institute for Advanced Studies, Vienna Graduate School of Finance, and MIT Sloan School of Management#N# · ³ University of Vienna

Review of Financial Studies 2008

We explain and provide evidence for effects of leverage on pricing. Our model identifies two effects that either counteract or reinforce each other, depending on the debt maturity structure: (i) firms set higher prices (underinvest in market share) if they have more debt, and (ii) firms engage in dynamic risk-shifting by setting lower (higher) prices if the current debt obligation will be higher (lower) in the next period than in the present period. Using a unique dataset of owner-managed hotels in Austrian ski resorts, we provide empirical evidence of both effects. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

DOI: 10.1093/rfs/hhn048
Volume: 21 (4)
Pages: 1733-1765
Language: en
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