Researcher ORCID Identifier

0009-0003-8457-1213

Graduation Year

2025

Date of Submission

4-2025

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Benjamin Gillen

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2025 Varidhi Singh

Abstract

While equity investors have long prioritized pricing power as a key indicator of long-term value creation, it is rarely emphasized by debt stakeholders. Existing literature on capital structure determinants largely overlooks pricing power perhaps due to the inherent misalignment between incremental profitability and lender returns, which are contractually fixed. This thesis challenges that perception by arguing that pricing power should be a critical consideration in lending decisions. Firms with strong pricing power can preserve cash flows during macroeconomic volatility by passing cost increases onto customers. Without this ability, maintaining debt service capacity is difficult in inflationary environments, increasing the risk of interest payment defaults and covenant breaches. To test this hypothesis, I run panel OLS regressions using firm-level data and find that pricing power is positively and significantly associated with leverage, even after controlling for firm fundamentals and fixed effects. In the most robust specification, a one-unit increase in pricing power corresponds to an 11.4% increase in leverage. I then explore sized-based heterogeneity and find that the pricing power–leverage relationship is particularly pronounced among small-cap firms. The interaction term between pricing power and small-cap status is positive and highly significant (β = 0.0857, p < 0.01). Finally, I use the 1994 Interstate Banking and Branching Efficiency Act (IBBEA) as a quasi-natural experiment and present suggestive evidence of a causal relationship between pricing power and leverage. Overall, this thesis highlights pricing power as an underappreciated determinant of capital structure and advocates for its inclusion in credit risk frameworks.

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