Financial Leverage Interaction with Firm's Strategic Behavior: An Empirical Analysis

Abstract

New connections between firm's financial policy, stakeholder theory, and firms' strategic behavior have emerged. First, according to the stakeholder theory, firm's non-financial stakeholders should be taken into account as claimants to the firm's cash flow because they affect debt level. Second, the view that firm's debt will affect firms' strategic behavior is adopted. Nonetheless, foresighted firms would anticipate output market consequences of financial decisions; thus, output market conditions will influence leverage level. Therefore, we are faced by a two-direction effect, which is the aim of this paper. We estimate a simultaneous equations model with a sample of 2,112 Spanish manufacturing firms between 1993 and 1999. We specify a financial leverage equation that depends on stakeholder theory and firm's strategic behavior. Moreover, we specify a second equation to analyze how firm's strategic behavior is affected by financial leverage. Finally, leverage level is empirically showed to affect and be affected by firm's strategic behavior.