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A Theory of Corporate Scope and Financial Structure
Author(s) -
LI DAVID D.,
LI SHAN
Publication year - 1996
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1996.tb02699.x
Subject(s) - scope (computer science) , keiretsu , corporation , business , cash flow , finance , capital structure , point (geometry) , investment (military) , theory of the firm , industrial organization , economics , debt , computer science , geometry , mathematics , politics , political science , law , programming language
We simultaneously address three basic issues regarding the corporation: the optimal scope of operation, the optimal financial structure, and the relationship between these two. The starting point is that financial structure serves as a bonding device on the managers' self‐interest behavior. The effectiveness of this bonding depends on the distribution of the firm's future cash flow, which in turn depends on the firm's scope. Our theory also links the firm's investment decisions to its operation scope. As empirical implications, the theory reconciles the failure of the 1960s U.S. conglomerates with the success of the Japanese Keiretsu .