Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

 
2007 Annual International CHRIE Conference & Exposition 
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internationalization and leverage could also be caused by the uncertainties with regard to political and foreign 
exchange rate risks (Michel & Shaked, 1986). Acknowledging the conflicts among empirical evidence, Chen et al. 
(1997) proposed that the relationship could be contingent on the nature of the firms. Singh and Nejadmalayeri 
(2004) also proposed an inverted U-shaped relationship between the degree of internationalization and leverage. In 
the initial stage of internationalization, firms might be more vulnerable to environment risks, such as exchange rate 
or political risks, and have higher debt cost. But when firms are established in new markets, risk is greatly reduced 
so that the cost of debt would decrease and leverage rise. 
H3: Internationalization and leverage has an inverted U shaped relationship. 
 
Although most strategic management studies consider corporate strategy as a determinant of capital 
structure; Jensen’s agency cost theory (1986) predicts the direction to be the way around. The theory indicates that 
capital structure affects corporate governance which, in turn, affects strategies chosen by top executives. Therefore, 
the true nature of such relationship might be a reciprocal one as explained by Kochhar and Hitt (1998). They argued 
that due to the usually substantial funds required for diversification investment, firms often need external sources of 
funding. Therefore, the success of diversification depends, in part, on the financial resources available. Thus altering 
the financial resource profile of the firm, such as its capital structure, affects the nature of diversification pursued. In 
other words, the nature of diversification affects capital structure, thus altering the resource profile of the firm, and 
consequently its capital structure affects the nature of diversification pursued. Since internationalization in the hotel 
industry usually requires huge amount of external funding, such reciprocal relationship could also exist between 
internationalization and leverage. The reciprocal relationship also implies that internationalization and capital 
structure decisions could influence performance indirectly through each other. Therefore, internationalization serve 
as a media for capital structure decision to exert its influence on performance and internationalization would 
moderate capital structure decision’s impact on performance as well. 
H4: Internationalization and financial leverage have a reciprocal relationship. 
H5: Internationalization and financial leverage moderates each other’s impact on performance.