Corporate Leverage and

We explore the joint determination of product dierentiation strategy and corporate leverage in a setting where (i) product dierentiation is valued by customers; (ii) debt is necessary to discipline managers; and (iii) liquidation is costly for customers, in particular, when products are highly dierentiated from competitors' products. We show that when managerial incentive prob- lems call for high leverage, firms position their products closer to competitors to reduce deadweight costs customers incur in liquidation. We discuss our findings in light of case study evidence.