The Relative Influence of Competitive Intensity and Business Strategy on the Relationship between Financial Leverage and Performance

Posted: 16 Nov 2007  

Johnny Jermias

Simon Fraser University (SFU) - Beedie School of Business

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 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

Suggested Citation

Jermias, Johnny, The Relative Influence of Competitive Intensity and Business Strategy on the Relationship between Financial Leverage and Performance. British Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1030469

Johnny Jermias (Contact Author)

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada
604-291-4257 (Phone)
604-291-4920 (Fax)

Paper statistics

Abstract Views
927