From Finance to Marketing: The Impact of Financial Leverage on Customer Satisfaction

The authors examine how a firm's financial leverage affects marketing outcomes and consequent firm value. They find that leverage has a dual effect: it reduces customer satisfaction and moderates the relationship between satisfaction and firm value. The burden of making regular interest payments to debt holders pressures managers to generate adequate cash flows. The authors theorize that this may lead marketers to adopt short-term actions such as cutting advertising and research-and-development spending, which can hurt customer satisfaction by lowering perceived quality and perceived value. Furthermore, higher leverage reduces financial flexibility by constraining marketers from exploiting growth opportunities resulting from higher customer satisfaction. The authors empirically show that leverage leads to lower customer satisfaction, with advertising intensity mediating this effect. The negative impact of leverage on satisfaction is more pronounced for service firms and firms in competitive markets. Final...