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Financial Policy and Reputation for Product Quality

Vojislav Maksimovic1; Sheridan Titman2

1 University of British Columbia · 2 University of California, Los Angeles

Review of Financial Studies 1991

The effect of financial policy on a firm’s incentives to maintain its reputation for producing a high-quality product is analyzed. It is demonstrated that in certain situations debt will reduce a firm’s ability to credibly offer high-quality products and, as a consequence, will reduce its value. However, for firms with assets that have high salvage values in liquidation, debt may increase their ability to credibly offer high-quality products and, therefore, increase their values.

DOI
10.1093/rfs/4.1.175
Volume
4 (1)
Pages
175-200
Language
en
Export
BibTeX
Sources
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