Capital Structure and Corporate Strategy
55 Pages Posted: 1 May 2007
Date Written: January 2007
In this article we review and discuss empirical studies that examine how a firm's financing choice affects its strategic decisions and relationships with its non-financial stakeholders, such as its customers or workforce. Generally, high leverage appears to inhibit a firm's ability or willingness to compete aggressively, especially against well-financed competitors. Debt also disciplines the manager-worker relationship, preventing managers from hoarding labor during economic downturns. Many of the studies also indicate that a firm's relationships with its customers can be disrupted by concerns over the firm's long-term viability. A second purpose of this study is to highlight and discuss approaches researchers have taken to address endogeneity. Because leverage is chosen in advance by the firm, most of the studies we consider focus on exogenous shocks - either to the firm's competitive environment or to the firm's leverage ratio. For each study, we describe the particular endogeneity problem and then discuss each author's approach to it, emphasizing differences between approaches when they arise.
Keywords: capital structure, stakeholder relationships, competition
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