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Corporate Leverage and Product Differentiation Strategy

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  • Stefan ARPING
  • Gyöngyi LÓRÁNTH

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.

Suggested Citation

  • Stefan ARPING & Gyöngyi LÓRÁNTH, 2002. "Corporate Leverage and Product Differentiation Strategy," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 02.06, Université de Lausanne, Faculté des HEC, DEEP, revised May 2002.
  • Handle: RePEc:lau:crdeep:02.06
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    References listed on IDEAS

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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

    Keywords

    leverage; product differentiation; liquidation costs; customer lock-in strategies; innovation;

    JEL classification:

    • G0 - Financial Economics - - General
    • L0 - Industrial Organization - - General
    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General

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