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How capital structure influences diversification performance: A transaction cost perspective
Author(s) -
O'Brien Jonathan P.,
David Parthiban,
Yoshikawa Toru,
Delios Andrew
Publication year - 2014
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/smj.2144
Subject(s) - transaction cost , diversification (marketing strategy) , debt , monetary economics , agency cost , portfolio , capital structure , business , external debt , internal debt , economics , capital market , cost of capital , bond , extant taxon , corporate governance , finance , microeconomics , marketing , shareholder , profit (economics) , evolutionary biology , biology
Extant theories agree that debt should inhibit diversification but predict opposing performance consequences. While agency theory predicts that debt should lead to higher performance for diversifying firms, transaction cost economics ( TCE ) predicts that more debt will lead to lower performance for firms expanding into new markets. Our empirical tests on a large sample of Japanese firms support TCE by showing that firms accrue higher returns from leveraging their resources and capabilities into new markets when managers are shielded from the rigors of the market governance of debt, particularly bond debt. Furthermore, we find that the detrimental effects of debt are exacerbated for R&D intensive firms and that debt is not necessarily harmful to firms that are either contracting or managing a stable portfolio of markets . Copyright © 2013 John Wiley & Sons, Ltd.