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The capital structure implications of pursuing a strategy of innovation
Author(s) -
O'Brien Jonathan P.
Publication year - 2003
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.308
Subject(s) - equity (law) , capital structure , competition (biology) , debt , value (mathematics) , value proposition , business , industrial organization , economics , enterprise value , strategic management , competitive advantage , microeconomics , finance , marketing , ecology , machine learning , political science , computer science , law , biology
In this paper, we argue that consideration of firm strategy can help illuminate the choices managers make between debt and equity financing. Within an industry, the form of competition that each firm chooses will determine the strategic value to the firm of maintaining financial slack. Our empirical analysis yields strong support for the proposition that financial slack should be a particularly critical strategic imperative for firms pursuing a competitive strategy premised on innovation. We also demonstrate that firms pursuing such a strategy that fail to recognize the value of financial slack are likely to perform poorly. Copyright © 2003 John Wiley & Sons, Ltd.