ABSTRACT
Sustained competitive advantage can keep a firm earn and grow over its industry rivals in the market competition. It often arises from firm’s unique resource and ability. A strategy-oriented competitive advantage always emphasizes the sustainability of competition. As an important financial decision for a firm, the decision of capital structure must adapt to the firm’s strategic management. Barton and Gordon (1987) ever emphasized that any capital structure is defensive. Besides capital structure, financial policies should follow firm’s strategy. Therefore, it is obvious that the decision of capital structure should be put in the organizational objective, and can be well understood on the point of the strategic management. Andrews (1980) also pointed out that financing policy, as one of firm’s basic financial policies, should support firm’s long-term policies and be consistent with them. In practice, capital structure policy itself is in one part of corporate strategy. As to FCAs, they usually want to keep sufficient and stable internal cash in order to avoid financial risk, which helps their strategy to be enforced successfully. As a result, FCAs’ bankruptcy costs are usually very low even if they encounter economic recession. Bettis and Prahalad (1983) thought that keeping low capital structure can increase firm’s flexibility in operating
1 INTRODUCTION
It is a hot topic for a long time in the corporate financial field about how to choose a reasonable capital structure. Modigliani and Miller put forward the famous MM theorem in 1958. Since then, scholars relax the assumption of MM theorem step by step, and present various capital structure theories, such as pecking order theory, signal transmitting theory, agency theory and trade-off theory. With the development of economic globalization, firms have to face more and more changing environment. As a result, some financial scholars begin to pay much attention to the influence of the changes of environment on firm’s capital structure. Important findings in the literature show that competition in the product markets and macro economic changes will bring different capital structure (Brander and Lewis, 1986; Robert and Levy, 2003; Su and Zeng, 2009).
