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Financial Policy and Reputation for Product Quality

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  • Maksimovic, Vojislav
  • Titman, Sheridan

Abstract

The effect of financial policy on a firm's incentives to maintain its reputation for producing a high-quality product is analyzed. It is demonstrated that in certain situations debt will reduce a firm's ability to credibly offer high-quality products and, as a consequence, will reduce its value. However, for firms with assets that have high salvage values in liquidation, debt may increase their ability to credibly offer high-quality products and, therefore, increase their values. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Maksimovic, Vojislav & Titman, Sheridan, 1991. "Financial Policy and Reputation for Product Quality," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 175-200.
    • Handle: RePEc:oup:rfinst:v:4:y:1991:i:1:p:175-200
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