The Capital Structure Implications of Pursuing a Strategy of Product Differentiation

• Main Authors: Ying-Hua Huang, 黃英華
• Other Authors: Shuen-Ren Liu
• Format: Others
• Language: en_US
• Published: 2005
• Online Access: http://ndltd.ncl.edu.tw/handle/80214122836588471338

碩士 === 國立臺灣大學 === 會計學研究所 === 93 === The relationship between the capital structure choice and the competitive capabilities of firms has gained more and more importance in recent years as the fierce global competition. There are competing and sometimes dichotomous theories of what constitutes appropriate financing choice. The purpose of this study is to offer theoretical rationale and empirical assessment for an argument that decision concerning the choice of capital structure need to be linked with a firm’s competitive strategy, more specifically to differentiation strategy. An argument based in insights from organizational economics and strategic management is developed which suggests that a firm’s capital structure is an organizational element which must be aligned with the competitive strategy and the alignment has performance implications. The research findings are as follows: I. It indicates that firms which concentrate more on product uniqueness competition, relative to industry peers, induce firms to maintain lower leverage. While firms relatively emphasize on capital intensity differentiation tend to maintain higher leverage. II. For firms pursuing a differentiation strategy, whether in the dimension of product uniqueness or capital intensity, they should maintain a low debt level, or otherwise, a significant performance penalty on its Return on Assets (ROA) will incur. While using Market-to-Book Ratio (M:B) as a performance variable, there is no significant interaction between product competitive strategy and capital structure. The results of this study have not only theoretical but also practical implication. My findings indicate that capital structure is not just only affected by industry, regulatory and markets exogenous factors, but also determined by a firm’s strategy and its basis to compete within an industry. This implies that capital structure cannot be regard as an irrelevant thing to strategy. Managers who fail to align their firms’ capital structure may hamper the effectiveness of strategies and may suffer significant performance consequence.