The Relative Influence of Competitive Intensity and Business Strategy on the Relationship between Financial Leverage and Performance
Simon Fraser University (SFU) - Beedie School of Business
British Accounting Review, Forthcoming
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 managers' opportunistic behavior. These findings reinforce the need to consider the moderating factors such as strategic choice and the environment in which a firm operates when investigating the effects of leverage on performance.
Keywords: Business strategy, competitive intensity, financial leverage, performance
JEL Classification: D21, D40, D82, G32, G34, M41
Date posted: November 16, 2007
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