Gianpaolo Parise, Swiss Finance Institute and University of Lugano
This paper provides evidence for a causal effect of the threat of entry on capital structure in the airline industry. Building on the previous literature, the evolution of Southwest Airlines’ route network is used to identify routes where the probability of future entry dramatically increases. Empirical results show that when the most strategic route is threatened, incumbents increase the proportion of their long-term liabilities by 13 per cent before Southwest starts flying. Conversely, nothing happens when relatively unimportant routes are threatened. Similar results are found using the industry deregulation during the Carter administration as a quasi-natural experiment. Overall, my findings suggest that airlines respond to entry threats by lengthening the maturity of their debt in order to reduce liquidity risk and discourage actual entry.
Gianpaolo Parise is a PhD candidate at the Swiss Finance Institute at the University of Lugano campus, and since January 2014 a visiting PhD student at Harvard University. His main research interests are in empirical corporate finance, institutional investors, and the real effects of financial markets. His research has been presented at several international conferences and seminars such as the American Finance Association meeting, the Eurofidai conference in Paris, the Harvard Business School seminar, the European Financial Management Association and the French Finance Association meeting.