Capital structure and the firm’s life stage

A Frielinghaus,B Mostert,C Firer

doi:10.4102/sajbm.v36i4.640

A Frielinghaus, B Mostert + Show 1 more

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https://doi.org/10.4102/sajbm.v36i4.640

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Abstract

In this paper we argue the case for a relationship between capital structure and a firm’s life stage. We provide an overview of the two sets of theories and follow this with a proposed linkage between the life stage and capital structure. We use the Adizes life stage model to assess the life stage of the firms in our sample. Our pilot study found a statistically significant relationship between life stage and the capital structure of respondents. The nature of the relationship (more debt in the early and late life stages than in prime) supports the pecking order theory of capital structure and suggests a practical use of the life stage model in helping firms to understand how their financing is likely to change over time.

Highlights

Much of the ground-breaking work in the field of corporate finance has focused on why firms choose differing proportions of debt and equity to finance their operations
Capital structure theory and organisational life stage theory are generally approached in isolation
In order to lay a theoretical framework for our study, we review organisational life stage theory and capital structure theory literature independently

Summary

Introduction

Much of the ground-breaking work in the field of corporate finance has focused on why firms choose differing proportions of debt and equity to finance their operations. One of the five sub-theories proposes that capital structure may be influenced by the organisational life stage of a firm, as financing needs may change with the changing circumstances of the firm (Damodaran, 2001; Bender & Ward, 1993). Capital structure research has typically been carried out by researchers with a background in corporate finance or economics, while organisational life stage theory has evolved out of research in the field of strategic management. The aim of this study, is to examine the theoretical literature, to synthesise insights from two different academic fields, corporate finance and strategic management, in a way that adds value to both, and to undertake a pilot study which investigates the relationship between a firm’s life stage and its capital structure

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