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

Review of Financial Economics - Tập 33 - Trang 29-40 - 2017
John Bae1, Sang-Joon Kim2, Hannah Oh3
1Finance at Elon University, NC 27244, United States
2Management at Ewha School of Business, Ewha Womans University, South Korea
3Marketing at the College of Business Administration, University of Nebraska Omaha, NE 68182, United States

Tóm tắt

AbstractThis 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.

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Review of Financial Economics

Tập 33

29-40

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