Capital structure and corporate governance are the important areas that represent salient part of corporate finance research. Ultimately, the optimal capital structure is one that minimizes the wacc. 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. An investment strategy is the decisions that an investor makes while investing his or her capital in different stocks and shares. It is the permanent financing of a firm represented by longterm debt, preferred. As we will see, virtually all empirical studies that attempt to shed light on the connection between capital structure and a firms corporate strategy. Chapter iii concepts and theories of capital structure and profitability. Corporate strategies complement traditional finance paradigms and extend our insight into a firms decisions. Earlier fusion of strategic and financial literature led to a series of propositions antecedent to this work.
Business strategy usually occurs at business unit or product level emphasizing the improvement of competitive position of a firms products or services in an industry or market segment served by that business unit. The relationships between capital structure and corporate strategy in previous u. Integration is negatively related to firms debt ratio. A survey of the relation between capital structure and. The impact of corporate strategy decisions on capital structure has attracted. Since the strategy is modelbased, we start with an introduction to cds pricing, and then explore issues of. Corporate strategy encompasses a firms corporate actions with the aim to achieve company objectives while achieving a competitive advantage. Financial scholars, unable to agree on a desirable mix of debt and equity, have. Corporate diversification strategies and capital structure. The relationship between the corporate strategy and capital structure. By studying various aspects of the two areas, this study attempts to. 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 paper explores a vast body of literature in articulating critical issues in capital structure decision. Discussion of capital structure relates closely to the issue of accurately calculating the wacc.
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. This paper reacts to the general call for mix in the middle of money and methodology research by. Corporate strategy and capital structure wiley online library. The patterns of corporate capital structures around the world are also discussed. Specifically, the paper concentrates on the connection. Capital structure is a permanent type of funding that supports a. The impact of corporate sustainability on organizational. Pdf the impact of corporate strategy on capital structure of. The impact of corporate strategy on capital structure.
Capital structure management capital structure strategy. Business strategy falls in the in the realm of corporate strategy. The impact of corporate strategy on capital structure of australian companies article pdf available in managerial and decision economics 153. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.
In particular, we consider how capital structure affects a firms interaction with its nonfinancial stakeholders and competitors. 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. Abstract the relationships between capital structure and corporate strategy in previous u. Making capital structure support strategy the issue is more nuanced than some pundits suggest. 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. We supported the client in evaluating and responding. Corporate strategy and capital structure brunel university. Pdf research into the capital structure of firms has been the subject of extensive empirical investigation but further progress may be. Four simple words but they signal very different and very complex challenges and demands. The relationship between the corporate strategy and capital structure sultan omar alamoudi. In japan, it is the keiretsus other asian countries have modeled their system after japan, with family. First of all, capital structure affects the behavior of nonfinancial stakeholders, as claimants to the firms cash flows in addition to shareholders and bondholders. Capital structure theories introduction capital structure decision is a significant decision in financial management.
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. Corporate strategy is hierarchically the highest strategic plan of the organization, which defines the corporate overall goals and directions and the way in which will be achieved within. The capital structure of a company is made up of debt and equity securities that comprise a firms financing of its assets. In germany, the banks form the core of this system. Analyzing a companys capital structure investopedia.
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. Corporate systems supplement customary money ideal models and broaden our understanding into a companys choices with respect to capital structure. 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. The idea of joining strategy literature and financial literature to address the capital structure question arose in two ways. Capital structure management a companys capital structure refers to the combination of its various sources of funding.
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. In theory, it may be possible to reduce capital structure to a financial calculation to get the. You will be introduced to strategic risk management and the substitutability of capital. 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.
Capital structure and corporate strategy by christopher a. The third, and final, part of strategic corporate finance adopts an enterprisewide perspective for capital management. Corporate strategy, the overall plan for a diversified company, is both the darling and the stepchild of contemporary management. Financial theories and studies further conclude that it is paramount for companies to understand the relationship between. Most companies are funded by a mix of debt and equity, including. The term capital structure refers to the percentage of capital money at work in a business by type. The capital structure will have an impact on the overall performance of firms as tested.
We helped a large it company that wished to clearly link its capital structure to shareholder value creation. Making capital structure support strategy mckinsey. In particular, the paper focuses on the link between capital structure and strategy. This decision in a private enterprise is directed towards the achievement of.
The relationship between the corporate strategy and. A note on corporate strategy and capital structure taylor 1995. Debt comes in the form of bond issues or longterm notes. Applications in valuation and capital structure, pettit brings a fresh and practical approach to corporate. We consider three types of corporate strategy in one, comprehensive view. Pdf a note on corporate strategy and capital structure. Corporate strategy and capital structure barton 1988. Capital structure and corporate strategy sciencedirect. While there have been studies on capital structure and corporate strategy. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters. The underlying logic here is that a companys strategic options are bounded by the environment. Internationalization is negatively related to firms debt ratio. The effect of corporate strategy and capital structure on.
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