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

Mehdi Khedmati, Edwin Kia Yang Lim, Vic Naiker, Farshid Navissi

Research output: Contribution to journalArticleResearchpeer-review

7 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)111-141
Number of pages31
JournalJournal of Management Accounting Research
Volume31
Issue number2
DOIs
Publication statusPublished - 2019

Keywords

  • Hybrid business strategy
  • Implied cost of equity capital
  • Pure business strategy

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