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Linking corporate strategy to capital structure: diversification strategy, type and source of financing
Author(s) -
Kochhar Rahul,
Hitt Michael A.
Publication year - 1998
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/(sici)1097-0266(199806)19:6<601::aid-smj961>3.0.co;2-m
Subject(s) - diversification (marketing strategy) , capital structure , equity financing , finance , business , corporate finance , debt , internal financing , debt financing , equity (law) , external financing , reciprocal , economics , marketing , linguistics , philosophy , political science , law
This study examines the relationship between corporate strategy and capital structure, specifically the diversfication and financing strategies of a firm. The results show that equity financing is preferred for related diversification and unrelated diversification is associated with debt financing. Additionally, firms diversifying through acquisitions are more likely to use public sources of financing and those emphasizing internal development of new businesses depend primarily on private sources of financing. Using simultaneous equation estimation, we found a reciprocal relationship between a firm's financial strategy and its corporate diversification strategy. Mode and nature of diversification are also reciprocally interrelated. © 1998 John Wiley & Sons, Ltd.