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How Capital Structure Influences Diversification Performance: A Transaction Cost Perspective, Jonathan O'Brien, Parthiban David, Toru Yoshikawa, Andrew Delios
How Capital Structure Influences Diversification Performance: A Transaction Cost Perspective, Jonathan O'Brien, Parthiban David, Toru Yoshikawa, Andrew Delios
Research Collection Lee Kong Chian School Of Business
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 …
Rational Financial Management: Evidence From Seasoned Equity Offerings, Michael Barclay, Fangjian Fu, Clifford Smith
Rational Financial Management: Evidence From Seasoned Equity Offerings, Michael Barclay, Fangjian Fu, Clifford Smith
Research Collection Lee Kong Chian School Of Business
Current theories of capital structure have difficulty explaining the aspects of financing behavior we document. In contrast to the tradeoff theory, seasoned equity offers frequently move firms away from their target leverage ratios. At odds with the pecking-order theory, SEO firms typically are financially healthy companies with low leverage, unused debt capacity and substantial cash balances. Inconsistent with the market-timing theory, SEOs appear to be driven by capital requirements associated with large investment projects rather than by market-timing considerations. Moreover, firms issue debt following SEOs, not only to finance investment, but to increase leverage toward its target level. Each of …