Does Earning Pressure Increase or Reduce Competitiveness?

Business Seminar with Javier Gimeno (INSEAD) and Center for Strategic Management and Globalization.

Does Earning Pressure Increase or Reduce Competitiveness? Evidence from the U.S. Airline Industry

ABSTRACT:

This paper studies the impact of capital market pressure on the firm's strategic behavior and the competitive interaction with its rivals in product-market competition. Using data from the US airline industry, we examine whether pressures to meet analysts' earnings forecasts, and existing financial constraints, influence the airlines competitive behavior in terms of capacity expansion and price changes, and how these effects influence competitive response.

We find that firms reduce the aggressiveness of their strategic behavior (by reducing capacity investments and increasing pricing) if they confront earnings pressure or face financial constraints. These effects lead to systematic competitive responses. Firms increase their capacity and reduce their price when their rivals' earnings pressure is high. The effect of earnings ressure is partially moderated by the financial constraints binding the firms