Article1991

Financial Policy and Reputation for Product Quality

Vojislav Maksimovic · Sheridan D. Titman

533 citations0/0 files storedReview of Financial Studies

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Corporate Finance and Governance Corporate Insolvency and Governance Corporate Identity and Reputation

Abstract

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.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1977Determinants of corporate borrowing 1981The Role of Market Forces in Assuring Contractual Performance 1982Reputation and imperfect information 1973A STATE‐PREFERENCE MODEL OF OPTIMAL FINANCIAL LEVERAGE 1983Premiums for High Quality Products as Returns to Reputations 1966Theory of the Firm

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