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A Survey of the Relation Between Capital Structure and Corporate Strategy

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Author(s): M. La Rocca | T. La Rocca | Dionigi Gerace

Journal: Australasian Accounting Business and Finance Journal
ISSN 1834-2000

Volume: 2;
Issue: 2;
Start page: 1;
Date: 2008;
Original page

Keywords: Overinvestment | underinvestment | risk-shifting | capital structure | corporate strategy

ABSTRACT
This paper responds to the general call for integration between finance and strategy researchby examining how financial decisions are related to corporate strategy. In particular, the paperfocuses on the link between capital structure and strategy. Corporate strategies complementtraditional finance paradigms and extend our insight into a firm’s decisions regarding capitalstructure. Equity and debt must be considered as financial instruments as well as strategicinstruments of corporate governance (Williamson 1988). Debt subordinates governanceactivities to stricter management, while equity allows for greater flexibility and decisionmakingpower.The literature on finance and strategy analyzes how the strategic actions of key players(managers, shareholders, debtholders, competitors, workers, suppliers, etc) affect firm valueand the allocation of value between claimholders. Specifically, financing decisions canconcern value creation process (1) influencing efficient investments decisions according to theexistence of conflict of interest between managers and firm’s financial stakeholders(shareholders and debtholders) and (2) affecting the relationship with non-financialstakeholders, as suppliers, competitors, customers.To summarize, the potential interaction between managers, financial stakeholders, and nonfinancialstakeholders influences capital structure, corporate governance activities, and valuecreation processes. These in turn, may give rise to inefficient managerial decisions or theymay shape the industry’s competitive dynamics to achieve a competitive advantage. A goodintegration between strategy and finance dimensions can be tantamount to a competitiveweapon.
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