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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5498.
Length: Date of creation: Mar 1996 Date of revision: Publication status: published as Review of Financial Studies (1998). Handle: RePEc:nbr:nberwo:5498
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Find related papers by JEL classification: G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
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