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Business strategy and the cost of equity capital: an evaluation of pure versus hybrid business strategies

journal contribution
posted on 2019-01-01, 00:00 authored by Mehdi Khedmati, Edwin LimEdwin Lim, Vic Naiker, Farshid Navissi
: We examine the effect of pure (product differentiation or cost leadership) versus hybrid (a mix of product differentiation and cost leadership) business strategies on the cost of equity capital. Our results suggest that firms with a pure, relative to a hybrid, business strategy have a significantly lower cost of equity, and the cost of equity effect is equally driven by pure product differentiation and pure cost leadership strategies. We also find that firms following a pure business strategy are associated with lower systematic risk. Further, the lower cost of equity effect of a pure product differentiation strategy is more pronounced in high-technology industries and in regions with greater innovative capital. Our findings are robust to an array of robustness checks including change specification regressions and various methods for addressing endogeneity.

History

Journal

Journal of Management Accounting Research

Volume

31

Season

Summer

Pagination

111-141

Location

Lakewood Ranch, Fla.

ISSN

1049-2127

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Copyright notice

2018, Journal of Management Accounting Research

Issue

2

Publisher

American Accounting Association