On the strategic use of debt and capacity in rapidly expanding markets

- We exploit the 1996 telecommunications deregulation as a natural experiment.
- In contrast with most previous studies, we focus on a rapidly expanding market.
- We find that incumbents increase leverage but not capacity after deregulation.
- The higher leverage relative to one's rivals is positively related to market shares.
- This behavior appears only in telecom segments most affected by the deregulation.

We exploit the 1996 telecommunications deregulation as a quasi-natural experiment to investigate whether incumbents alter debt and capacity tactics when facing new rivals. We find that incumbents increase leverage after deregulation, even when controlling for traditional determinants and market conditions. Consistent with a new post-deregulation benefit, a higher leverage is positively related to market shares. This behavior appears only in telecommunication segments most affected by the deregulation. We find weak evidence for increased use of capacity tactics. Our findings for incumbents facing an influx of rivals in a rapidly expanding market differ from those of earlier studies considering mature markets.