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Corporate Leverage and Product Differentiation Strategy

Author

Listed:
  • Stefan Arping

    (University of Amsterdam)

  • Gyöngyi Lóránth

    (University of Cambridge, Cambridge Endowment for Research Finance, and Centre for Economic Policy Research)

Abstract

This article develops a model of the interplay between corporate leverage and product differentiation strategy. Leverage improves managerial discipline, but it can also raise customer concerns about a vendor's long-term viability. We argue that customer concerns about firm viability will be particularly pronounced when products are highly differentiated from competitors' products. In this context, optimal product differentiation strategies solve a trade-off between softening price competition and reducing customers' total cost of ownership. Our analysis is consistent with empirical evidence suggesting a negative correlation between corporate leverage and product uniqueness.

Suggested Citation

  • Stefan Arping & Gyöngyi Lóránth, 2006. "Corporate Leverage and Product Differentiation Strategy," The Journal of Business, University of Chicago Press, vol. 79(6), pages 3175-3208, November.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:6:p:3175-3208
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    File URL: http://dx.doi.org/10.1086/505253
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    Cited by:

    1. Cristina Aybar-Arias & Alejandro Casino-Martínez & José López-Gracia, 2012. "On the adjustment speed of SMEs to their optimal capital structure," Small Business Economics, Springer, vol. 39(4), pages 977-996, November.

    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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