Leverage-Performance Interaction and Strategic Competition in a Product Market: An Empirical Analysis from Pakistan
Institute of Management Sciences, Peshawar
This research explores a role of competition among rivals in leverage induced product market performance. The employed method of an inquiry is an empirical examination of 207nonfinancial firms listed on Karachi Stock Exchange over the period 1999-2013. Product market competition is characterized by rivals’ response to a strategic move made by a firm and classified into Cournot and Bertrand Competition. A lack of response indicates a competition in strategic substitutes (Cournot), and a response with a similar strategy specifies a competition in strategic complements (Bertrand). The study uses Competitive Strategic Measure (CSM) to identify the type of competition in the examined industries. Consistent with (Brander & Lewis, 1986), leverage enhances performance significantly when firms compete in strategic substitutes. The significant role of leverage, however, diminishes in determination of performance in industries where firms compete in strategic complements as predicted in (Dasgupta & Titman, 1998). The results remain qualitatively unchanged when subjected to robustness check. The findings are important extension to the international and indigenous evidence with implications for the real world practicing managers particularly in Pakistan.
Keywords: Leverage, Performance, Strategic Interaction, Cournot Competition, Bertrand Competition