Chapter 13 - Capital Structure and Corporate Strategy

Abstract

This chapter reviews and discusses 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 the firm's relationships with its customers can be disrupted by concerns over the firm's long-term viability. This chapter also highlights and discusses approaches researchers have taken to address endogeneity. Because the firm chooses leverage in advance, most of the studies it considers focus on exogenous shocks—either to the firm's competitive environment or to its leverage ratio. Furthermore, it discusses endogeneity problems that arise in empirical corporate finance research in general and describes how researchers studying capital structure explicitly deal with this problem. Apart from this, it sheds light on the connection between capital structure and a firm's corporate strategy that potentially suffer from significant endogeneity problems.