Tuesday, July 26, 2016

Threat of entry and debt maturity: evidence from airlines

Gianpaolo Parise identifies Threat of entry and debt maturity: evidence from airlines.

ABSTRACT: I explore the effect of the threat posed by low-cost competitors on debt structure in the airline industry. I use the route network expansion of low-cost airlines to identify routes where the probability of future entry increases dramatically. I find that when strategic routes are threatened, incumbents significantly increase debt maturity before entry occurs. Overall, the main findings suggest that airlines respond to entry threats trading off financial flexibility for lower rollover risk. The results are consistent with models in which firms set their optimal debt structure in the presence of costly rollover failure.


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