The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance |
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| Authors: | Johnny Jermias |
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| Institution: | aFaculty of Business Administration, Simon Fraser University, 8888 University Drive, Burnaby, BC, Canada;bNanyang Business School, Nanyang Technological University, Block S3, Nanyang Avenue, Singapore 639798, Singapore |
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| Abstract: | This study empirically investigates the effects of competitive intensity and business strategy on the relationship between financial leverage and the performance of firms. Based on a sample of US manufacturing firms, this study confirms the hypothesis that the cost of debt is higher for product differentiation firms than cost leadership firms. Furthermore, the results indicate that competitive intensity has a negative effect on the leverage-performance relationship, suggesting that competition acts as a substitute for debt in limiting manager's opportunistic behavior. These findings reinforce the need to consider moderating factors such as strategic choice and the environment in which a firm operates when investigating the effects of leverage on performance. |
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| Keywords: | Business strategy Competitive intensity Financial leverage Performance |
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