Department of Finance, HKUST
Clear Water Bay, Kowloon
NBER Working Papers and Publications
|March 1996||Pricing Strategy and Financial Policy|
with Sheridan Titman: w5498
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 levered firm charging higher prices on average. Notable exceptions exist when rival firms are relatively unlevered. The first observation is consistent with a relatively simple model where firms compete for market share on the basis of price. To explain the second observations (i.e. the exceptions) the model must be extended to allow for reputation effects related to product quality. The extended model illustrates how product market imperfections in combination with high leverage can make firms vulnerable to predatory pricing.
Published: Review of Financial Studies (1998). citation courtesy of