ABSTRACT
Previous research found capital structure effects on performance when it is adapted to the level of environmental dynamism and pursuit of an innovation strategy. The current study reproduces some of these relationships in a recent dataset and identifies significant nuances across industrial environments. Analyses of a large cross-sectional sample with various industry subsamples suggest that other factors influence capital structure effects including flexibilities in multinational organization and effective strategic risk management capabilities.
Recent strategy research on capital structure effects (Simerly and Li, 2000) found empirical evidence of interactive performance relationships between environmental dynamism and financial leverage. A subsequent study demonstrated that capital structure has a comparable influence on the performance of innovation strategy (O'Brien, 2003). These findings are highly relevant in the context of the ‘hypercompetitive’ conditions that seem to permeate contemporary business environments (D'Aveni, 1994; Thomas, 1996). To pursue these issues further, this chapter presents the results of a study based on more recent data covering the period 1996–2000 across firms operating in different industrial environments.
The study replicates some of the effects of dynamism and innovation found in the previous studies but also identifies differences across subsamples of specific industry segments where expected effects are subdued or even show inverse relationships. This has urged the consideration of other potential influencers on the strategic effects of capital structure deriving from the firm’s ability to respond to changes in environmental conditions. Given the considerable emphasis on potential advantages from flexibilities embedded in multinational organizations (Kogut and Kulatilaka, 1994) and risk management capabilities (Miller, 1998), this research considered potential confounding effects from these factors in addition to dynamism and innovation on the relationship between capital structure and performance.
The chapter is structured as follows. First, there is a brief overview of the basic finance and strategic management literatures on the choice of capital structure. Then aspects of agency theory, transaction cost economics, the resource-based view, and real options theory are incorporated in the development of hypotheses. Following this, the chapter describes an empirical study 321performed to test the hypotheses and the results of the study are presented. Finally, the chapter offers a discussion of the findings and provides tentative conclusions.
