Why Leverage Affects Pricing

We explain and provide evidence of effects of leverage on pricing. Our model identifies two interacting effects: firms set higher prices (under-invest in market share) if they have more debt, but engage in dynamic risk-shifting by setting lower prices (over-invest in market share) just prior to an increase in debt obligations. The debt maturity structure determines whether these effects counteract or reinforce each other. We provide empirical evidence of both effects using a unique data set of owner-managed hotels in Austrian ski resorts