Corporate Leverage and Product Differentiation Strategy

Stefan Arping and Gyöngyi Lóránth
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Stefan Arping: University of Amsterdam
Gyöngyi Lóránth: University of Cambridge, Cambridge Endowment for Research Finance, and Centre for Economic Policy Research

Journal of Business, 2006, vol. 79, issue 6, pages 3175-3208

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.

Date: 2006

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