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

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  • Jermias, Johnny

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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  • Jermias, Johnny, 2008. "The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance," The British Accounting Review, Elsevier, vol. 40(1), pages 71-86.
    • Handle: RePEc:eee:bracre:v:40:y:2008:i:1:p:71-86
    DOI: 10.1016/j.bar.2007.11.001
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    3. Khalil Assala & Suela Bylykbashi & Gilles Roehrich, 2021. "How To Measure Competitive Intensity?," Post-Print hal-03381232, HAL.
    4. James Sunday Kehinde & Sehilat Abike Bolarinwa & Olukayode Ezekiel Ibironke, 2022. "Firm Size, Financial Leverage and Firm Performance: Evidence from Firms Listed in the Non-Financial Sectors of the Nigeria Stock Exchange," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(12), pages 188-195, December.
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    6. Kodongo, Odongo & Mokoaleli-Mokoteli, Thabang & Maina, Leonard, 2014. "Capital structure, profitability and firm value: panel evidence of listed firms in Kenya," MPRA Paper 57116, University Library of Munich, Germany.
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    10. Bassam M. Abu-Abbas, Turki Alhmoud, Fatima A. Algazo, 2019. "Financial leverage and firm performance: evidence from Amman stock exchange," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 16(2), pages 207-237, December.
    11. Meysam Kaviani & Reza Shahmanosuri & Maryam Batebi & Seyed Reza Seyednezhad Fahim, 2014. "Aggressive, Conservative and Moderate Policy in Working Capital Management and Firms Free Cash Flow Yield (FCFP) Evidence from Tehran Stock Exchange," International Journal of Empirical Finance, Research Academy of Social Sciences, vol. 2(3), pages 130-136.
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    14. Abdullahi Hassan Gorondutse & Haim Hilman, 2019. "Testing the Effect of Business-level Strategy on Performance of Hotels," Global Business Review, International Management Institute, vol. 20(5), pages 1141-1154, October.
    15. Omer Bagais & Khaled Aljaaidi & Abdulaziz Alothman, 2021. "An Empirical Investigation of the Associations of Short and Long Debt Policies with Economic Values of Energy Sector," International Journal of Energy Economics and Policy, Econjournals, vol. 11(1), pages 249-254.
    16. Kwieciński Dariusz, 2017. "Measures of Competitive Intensity – Analysis Based on Literature Review," Journal of Management and Business Administration. Central Europe, Sciendo, vol. 25(1), pages 53-77, March.
    17. Zahoor Hussain Javed & Huma Huma Rao & Bader Akram & Muhammad Fayyaz Nazir, 2015. "Effect of Financial Leverage on Performance of the Firms: Empirical Evidence from Pakistan," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(1-2), pages 87-95, January-M.
    18. Darush Yazdanfar & Peter Öhman, 2015. "Debt financing and firm performance: an empirical study based on Swedish data," Journal of Risk Finance, Emerald Group Publishing, vol. 16(1), pages 102-118, January.
    19. Mahmoud Al-Rdaydeh & Ammar Yaser Almansour & Mohammad Ahmad Al-Omari, 2018. "Moderating effect of competitive strategies on the relation between financial leverage and firm performance: evidence from Jordan," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(3), pages 626-641, June.
    20. Alim, Wajid & Ali, Amjad & Minhas, Amna Shafiq, 2022. "The Impact of Leverage on the Firm Performance: A Case of Fertilizers Sector of Pakistan," MPRA Paper 114200, University Library of Munich, Germany.
    21. Lu Jiao & Graeme Harrison & Jinhua Chen, 2023. "Revenue growth in not‐for‐profit organisations: The effects of interactive and diagnostic controls and organisational culture," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2273-2294, June.
    22. Mari Avarmaa & Aaro Hazak & Kadri Männasoo, 2011. "Capital structure formation in multinational and local companies in the Baltic States," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 11(1), pages 125-146, July.
    23. Matolcsy, Zoltan & Wakefield, James, 2017. "Multinational headquarter control of wholly owned foreign subsidiaries," The British Accounting Review, Elsevier, vol. 49(3), pages 275-293.
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    More about this item

    Keywords

    Business strategy; Competitive intensity; Financial leverage; Performance;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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