When does financial leverage translate into short-term returns to equity? A resource conversion perspective on advertising, R&D, and firm innovativeness

Leveraged firms face pressure to generate cash flows and short-term returns, making advertising and R&D expenditures difficult to evaluate. This study examines when financial leverage translates into short-term accounting profitability and how this relationship depends on firm innovativeness, advertising intensity, and R&D intensity. Drawing on dynamic capabilities theory and the strategic emphasis framework, we argue that leverage does not automatically generate returns. Its effects depend on how firms allocate and convert financial resources. Using two U.S. samples of 683 innovative-firm and 464 less innovative-firm observations, we find that advertising intensity strengthens the leverage–ROE relationship among less innovative firms, and formal cross-group tests confirm that this moderation differs across innovation contexts. The predicted negative R&D moderation among innovative firms is not robustly supported for ROE, whereas equivalence tests indicate practically negligible R&D moderation among less innovative firms. These findings clarify when advertising helps leveraged firms convert financial resources into short-term returns.