Corporate Leverage and Product Differentiation Strategy
26 Pages Posted: 29 Aug 2002
There are 2 versions of this paper
Corporate Leverage and Product Differentiation Strategy
Date Written: July 2002
Abstract
We explore the joint determination of product differentiation strategy and corporate leverage in a setting where (i) product differentiation is valued by customers; (ii) debt is necessary to discipline managers; and (iii) liquidation is costly for customers, in particular, when products are highly differentiated from competitors' products. We show that when managerial incentive problems call for high leverage, firms position their products closer to competitors to reduce deadweight costs customers incur in liquidation. We discuss our findings in light of case study evidence.
Keywords: Leverage, product differentiation, liquidation costs, customer lock-in strategies, innovation
JEL Classification: G3, L1, L2
Suggested Citation: Suggested Citation
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