Abstract
Competitive advantage is the key to a company’s success, and the business strategy represents a long-term plan to achieve a competitive advantage by affecting the company’s financial behavior. This research studies the interaction of business strategy, competitive advantage, and financial strategy to explore whether companies choose different financial strategies based on their business strategies as well as what role competitive advantage plays in their decision-making. By building a composite index and observing maturity mismatched investment, this research quantifies the risk level of business strategies and financial strategies. Using text analysis of a company’s annual report, the research builds a dummy variable to measure the competitive advantage. Based on the samples of A-shares listed on the China Shanghai and Shenzhen stock exchanges from 2007 to 2016, the research shows that the risk level of business strategy and financial strategy tends to move in opposite directions. If a company embraces an aggressive business strategy, it is more likely to choose a conservative financial approach in terms of lower overall risks, but for the company with a competitive advantage, the negative correlation between these two strategies is weakened. Further analysis found that company ownership, free cash flow, and the quality of internal control also play a significant role in the interaction between business strategy and financial strategy. Our findings not only enrich research on business strategy and financial behavior, but also deepen the understanding of competitive advantage and corporate financial strategy theoretically.
Highlights
Achieving a competitive advantage to survive in an increasingly competitive market environment is always a prime target for theoretical research as well as practical strategy conception
Prospectors focus on developing new products and markets to gain competitive advantage; defenders focus on existing market and achieve competitive advantage by ensuring the best price and service; while analyzers function in ways in between that of prospectors and defenders
This paper shows the results of our study on the influence of business strategy on maturity mismatched investment based on the business strategy theory (Miles et al, 1978) and the strategy
Summary
Achieving a competitive advantage to survive in an increasingly competitive market environment is always a prime target for theoretical research as well as practical strategy conception. As business strategy determines the long-term path and goals of companies, it can help to. 164 Journal of Competitiveness achieve competitive advantage in various ways. Established academic strategic research categorizes business strategy into three types of actor based on the level of aggression: defenders, analyzers, and prospectors (Miles et al, 1978). As business strategies determine the behavior of companies to achieve a competitive advantage, they provide companies with different characters in terms of financial activity. Previous research quantificationally measuring business strategy by corporate accounting data has found that when a company implements the prospectors approach, financial fraud is more likely to ensue (Bentley et al, 2013)
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