Interactions between Financial Leverage and Product Quality in the Tourism & Leisure Industry: Testing the Moderating Role of Business Conditions

The present study develops a new model and proposes new research impetus by searching the effects of financial leverage and its related control variables on the level of product quality offered by business firms. Another contribution of this research study to the literature is that the moderating role of business conditions in the effects of financial leverage on product quality is tested. Due to its importance among the other sectors, tourism and leisure industries have been selected in the case of United Kingdom (UK). The selection of the UK is important since it ranks 8th in attracting international tourists as of 2015 according to the statistics of World Tourism Organization. A panel data of 80 tourism and leisure firms in the UK have been constructed on quarterly basis as they were available from Thomson Reuters’ DataStream. Results of empirical analyses provide a strong evidence of negative effects of financial leverage on product quality. Financial leverage impact negatively on firm-level investments as well. This study finds that business conditions and macroeconomic performance in the UK have positively significant effects on firmlevel product quality; this shows that any positive climate in business environment at macro level would contribute to promotion of the quality levels of products offered by business firms. Another major finding of this new research study is that business conditions at macro level have significant moderating role in the relationship between financial leverage and product quality. This reveals that leverage positions of business firms are closely linked to business environment and this reality significantly impact on the level of product quality. This research study provides important and significant policy implications for policy makers. Keywords: Leverage; Investment; Product Quality; Tourism; Leisure; Moderating Role.