Corporate capital structure in the united states ciccolo and baum show that the chief aggregate features exhibited by this dataset over time are broadly consistent with the principal developments documented at the aggregate level by other researchers. Corporate strategy and capital structure barton 1988. Theoretical considerations a firm could use three methods to determine its capital structure. The theory and practice of corporate capital structure january 2006 2 liability strategies group executive summary this paper discusses the theory and practice of corporate capital structure, drawing on results from a recent survey. Pdf research into the capital structure of firms has been the subject of extensive empirical investigation but further progress may be. An alternative corporate governance system n germany and japan developed a different mechanism for corporate governance, based upon corporate cross holdings. Since the strategy is modelbased, we start with an introduction to cds pricing, and then explore issues of implementation with the help of the analytical framework. In particular, we consider how capital structure affects a firms interaction with its nonfinancial. While in practice these decisions are linked, thinking about a firms investment activity and corporate strategy separately allows us to better isolate the effects of capital structure on each. Capital structure and corporate strategy sciencedirect. The term capital structure refers to the percentage of capital money at work in a business by type. Making capital structure support strategy the issue is more nuanced than some pundits suggest. The value of an enterprise depends on expected earnings and cost of capital. Capital structure theories introduction capital structure decision is a significant decision in financial management.
Internationalization is negatively related to firms debt ratio. Making capital structure support strategy mckinsey. Talking about story lines allows me to set the first theme of this book. Financial scholars, unable to agree on a desirable mix of debt and equity, have called for managerial inputs. Pdf a note on corporate strategy and capital structure. Corporate strategies complement traditional finance paradigms and extend our insight into a firms decisions regarding capital structure. A practical framework for developing capital structure. Applications in valuation and capital structure, pettit brings a fresh and practical approach to corporate. It is the permanent financing of a firm represented by longterm debt, preferred stock and net worth. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters. Four simple words but they signal very different and very complex challenges and demands for the cdo.
The relationship between the corporate strategy and. Corporate strategies complement traditional finance paradigms and extend our insight into a firms decisions. In theory, it may be possible to reduce capital structure to a financial calculation to get the most tax benefits by favoring debt, for example, or to boost earnings per. This book tells a story, which essentially summarizes the corporate finance view of the. This paper examines the relationship between the levels of debt in the capital structure and performance for a sample of indian firms. The goals of corporate strategy are challenging not only for large firms like microsoft but also for small local computer retail outlets or even dry cleaners. Diversification is positively related to firms debt ratio. Pdf the impact of corporate strategy on capital structure of. The basic thesis of this exploratory investigation was that a corporate strategy perspective may complement the traditional financial paradigm in explaining capital structure in large u. Debt comes in the form of bond issues or longterm notes. Capital structure describes the mix of a firms longterm capital, which consists of a combination of debt and equity. Request pdf capital structure and corporate strategy. Abstract the finance literate has widely discussed two important relationships. The effect of corporate strategy and capital structure on performance of banking sector of pakistan.
The relationship between capital structure and profitability. The relationship between the corporate strategy and capital structure sultan omar alamoudi. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. In japan, it is the keiretsus other asian countries have modeled their system after japan, with family. Our study finds corporate development at a transformational inflection point. Investors choose some particular stocks focusing its past performance, risk tolerance, future forecast, return possibility, and other factors.
The effect of corporate strategy and capital structure on performance of banking sector of pakistan article pdf available in global journal of management and business research 1217 january. We consider three types of corporate strategy in one, comprehensive view. Kaumbuthu 2011 carried out a study to determine the relationship between capital structure and return on equity for industrial and allied sectors in the nairobi securities exchange during the period 2004 to 2008. First of all, capital structure affects the behavior of nonfinancial stakeholders, as claimants to the firms cash flows in addition to shareholders and bondholders. The idea of joining strategy literature and financial literature to address the capital structure question arose in two ways. Capital structure management capital structure strategy. The structure of capital markets in india, where both shortterm and longterm lending institutions are. The capital structure decision can affect the value of the firm either by changing the expected earnings or the cost of capital or both. Theories of capital structure explained with examples. While there have been studies on capital structure and corporate strategy. Capital structure management a companys capital structure refers to the combination of its various sources of funding. By studying various aspects of the two areas, this study attempts to deepen our understanding of the two. I have often relied on pettits prior works as useful. Likewise, strategy scholars have called for inputs from functional areas such as finance.
You will be introduced to strategic risk management and the substitutability of capital structure and risk management choices, such as process control efforts, financial, physical, and operational hedging. In particular, we consider how capital structure affects a firms interaction with its nonfinancial stakeholders and competitors. He addresses timely and pertinent topics that corporations face constantly. In particular, the paper focuses on the link between capital structure and strategy. Most companies are funded by a mix of debt and equity, including some shortterm debt, some longterm debt, a number of shares of common stock. Because interest payment on debt is tax deductible, the addition of debt in the capital structure will improve the profitability of. Analyzing a companys capital structure investopedia.
Chapter iii concepts and theories of capital structure and profitability. The paper explores a vast body of literature in articulating critical issues in capital structure decision. Cost leadership is a strategy that organizations implement by providing their products and services as low as consumers are willing to pay, thereby being competitive and realizing a volume of sales that allows them to be the leaders in the industry. I consider hybrids any financial instrument that presents a mix of equity and debt characteristics. Earlier fusion of strategic and financial literature led to a series of propositions antecedent to this work. Typical examples of cost leaders are walmart in the retail industry, mcdonalds in the restaurant industry, and ikea, the furniture retailer that. The effect of corporate strategy and capital structure on. Specifically, the paper concentrates on the connection. The relationship between the corporate strategy and capital structure. Corporate strategy and capital structure brunel university. This paper responds to the general call for integration between finance and strategy research by examining how financial decisions are related to corporate strategy. The story line in corporate finance has remained remarkably consistent over time.
Sources of raising long term finance and cost of capital 5. Relationship between capital structure and performance of. Once those prerequisites are in place, it can begin to consider changing its capital structure in ways that support the broader strategy. The relationship between capital structure and profitability cannot be ignored because the improvement in the profitability is necessary for the longterm survivability of the firm. Corporate strategy and capital structure wiley online library. The second edition of the handbook of financing growth has been designed to help leaders and advisors gain a solid understanding of the financing strategies, sources, and transactions that will allow them to excel in such an unpredictable environment written by an experienced group of practitioners who operate within this dynamic market. Capital structure and corporate strategy by christopher a. A company cant develop its capital structure without understanding its future revenues and investment requirements. The objective of the firm should be directed towards the maximization of the value of the firm the capital structure, or average, decision should be examined from the point of view of its impact on the value of the firm. The impact of corporate strategy on capital structure. So it relates to the arrangement of capital and excludes shortterm borrowings. An investment strategy is the decisions that an investor makes while investing his or her capital in different stocks and shares. Capital structure and corporate governance are the important areas that represent salient part of corporate finance research.
Each type of capital has its benefits and drawbacks, and a substantial part of wise corporate stewardship and management is attempting to find the perfect. The third, and final, part of strategic corporate finance adopts an enterprisewide perspective for capital management. An overview this paper responds to the general call for integration between finance and strategy research by examining how financial. Introduction capital structure refers to the different options used by a firm in financing its assets bhaduri, 2002. Capital structure was proxied by debt equity ratio while performance focused on return on equity. The results of the study indicate that the relationship between the corporate strategy and the capital structure differs depending on a companys type of ownership. In japan, it is the keiretsus other asian countries have modeled their system after japan, with family companies forming the core of the new corporate families. Abstract this study examines the relationship between corporate strategy and capital structure, specifically the diversfication and financing. This thesis consists of a study of english and us corporate finance law and, in particular, the law in relation to hybrid financial instruments. Since capital structure is the amount of debt or equity or both employed by a firm to fund its operations and finance its assets, capital structure is typically expressed as a debttoequity ratio. The data show an increasing importance of external funds, and especially of debt. The patterns of corporate capital structures around the world are also discussed. A survey of the relation between capital structure and corporate strategy abstract this paper responds to the general call for integration between finance and strategy research by examining how financial decisions are related to corporate strategy. This paper reacts to the general call for mix in the middle of money and methodology research by inspecting how monetary choices are identified with corporate system.
A survey of the relation between capital structure and. Integration is negatively related to firms debt ratio. The capital structure of a company is made up of debt and equity securities that comprise a firms financing of its assets. It is the employment of an asset source of finance for which. The relationships between capital structure and corporate strategy in previous u. In germany, the banks form the core of this system.
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