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Does Capital Structure Differently Affect Incumbents’ Responses to Entry Threat and Actual Entry?

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Document pages: 72 pages

Abstract: Some theories predict that firms with higher financial leverage compete more aggressively in product markets than firms with lower financial leverage, whereas others predict that lower-leverage firms compete more aggressively than higher-leverage firms. This paper studies how incumbent airlines’ capital structure affects their responses to Southwest Airlines’ entry threat and actual entry. The results indicate that, when responding to entry threat, lower-leverage incumbents cut prices more aggressively than higher-leverage incumbents; in contrast, when responding to actual entry, higher-leverage incumbents cut prices more aggressively than lower-leverage incumbents.

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