TY - JOUR
T1 - Taming polysemous signals
T2 - The role of marketing intensity on the relationship between financial leverage and firm performance
AU - Bae, John
AU - Kim, Sang Joon
AU - Oh, Hannah
N1 - Publisher Copyright:
© 2016 Elsevier Inc.
PY - 2017/4
Y1 - 2017/4
N2 - 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.
AB - 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.
KW - Firm financial leverage
KW - Firm valuation
KW - Marketing intensity
KW - Signaling
UR - http://www.scopus.com/inward/record.url?scp=85008656532&partnerID=8YFLogxK
U2 - 10.1016/j.rfe.2016.12.002
DO - 10.1016/j.rfe.2016.12.002
M3 - Article
AN - SCOPUS:85008656532
SN - 1058-3300
VL - 33
SP - 29
EP - 40
JO - Review of Financial Economics
JF - Review of Financial Economics
ER -