Simultaneous Impacts of International Diversification and Financial Leverage On Profitability

Abstract

This study examines international diversification and financial leverage in a simultaneous equations model to understand how they affect profitability after accounting for the endogeneity between strategic and financial decisions. An analysis of hotel companies showed an inverted U-shaped relationship between financial leverage and profitability, implying an optimal leverage pattern for maximum profitability. The study also found that international diversification significantly, but only indirectly, influences the profitability of hotel firms through the moderating role of leverage. This indicates that financial leverage is more closely related to profitability than international diversification. However, the results also suggest that the effect of international diversification still needs to be considered when making financial decisions.