Taming polysemous signals: The role of marketing intensity on the relationship between financial leverage and firm performance

John Bae, Sang‐Joon Kim and Hannah Oh

Review of Financial Economics, 2017, vol. 33, issue 1, 29-40

Abstract: This study attempts to reconcile the two strands of research on the impacts of financial leverage on firm valuation. The prior literature has shown that financial leverage has a polysemous effect. In other words, it provides two opposing signals of firm performance (i.e., financial distress vs. a driver of positive change in a firm's prospects). Given that the effects of financial leverage are contradictory, we specify how these divergent signals appear and propose that there is a non‐monotonic effect of financial leverage on firm valuation. The study also shows that marketing activities can be strategically implemented to tame these polysemous signals. Marketing activities are costly actions for a firm, especially one in an adverse environment with high leverage, and are rewarded in terms of firm valuation. Therefore, marketing activities can help reinforce the driver signal and alleviate the distress signal of financial leverage, thus increasing firm valuation. This study finds a U‐shaped relationship between financial leverage and Tobin's q and a positive moderating effect of marketing intensity on the curvilinear relationship.

Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://doi.org/10.1016/j.rfe.2016.12.002

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:33:y:2017:i:1:p:29-40

Access Statistics for this article

More articles in Review of Financial Economics from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().