The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance

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.     

The effect of organizational structure on efficiency: Evidence from the Spanish insurance industry

This paper provides new information on the effects of organizational structure on efficiency by analyzing Spanish stock and mutual insurers over the period 1989–1997. We test the efficient structure hypothesis, which predicts that the market will sort organizational forms into market segments where they have comparative advantages, and the expense preference hypothesis, which predicts that mutuals will be less efficient than stocks. Technical, cost, and revenue frontiers are estimated using data envelopment analysis. The results indicate that stocks and mutuals are operating on separate production, cost, and revenue frontiers and thus represent distinct technologies. In cost and revenue efficiency, stocks of all sizes dominate mutuals in the production of stock output vectors, and smaller mutuals dominate stocks in the production of mutual output vectors. Larger mutuals are neither dominated by nor dominant over stocks in the cost and revenue comparisons. Thus, large mutuals appear to be vulnerable to competition from stock insurers in Spain. Overall, the results are consistent with the efficient structure hypothesis but are generally not consistent with the expense preference hypothesis.     

The impact of opacity on bank valuation during the global financial crisis: A channel analysis

Prior literature suggests that opacity in the banking industry is mainly caused by a lack of informativeness in the assessment of the quality of bank assets. Examining a sample of bank holding companies in the United States, we find that there is a negative relationship between opacity and bank valuation during the 2007–2009 global financial crisis. We further attempt to identify two potential channels through which opacity negatively affects bank valuation during the financial crisis: a cash flow channel and an expected return channel. We show that one channel flows from bank profitability, measured by return on equity and return on assets, confirming a cash flow channel, whereas an expected return channel, proxied by the implied cost of capital, only works for small banks. Overall, this study sheds light on the relationship between in-transparency and bank value discount during a global recession.