Linking corporate strategy to capital structure: diversification strategy, type and source of financing

Article Abstract:

A study was conducted to extend research on the relationship between corporate strategy and capital structure. Specifically, it examined the relationship of diversification decisions on the nature of funds employed to support these decisions. Fund characteristics investigated in this study were the type of funds and the source of funds. Data were culled from a sample of 187 major manufacturing companies trading on the American Stock Exchange or New York Stock Exchange that diversified from 1982 to 1986. Findings revealed that equity financing is used for related diversification while debt financing is utilized for unrelated diversification. Results also showed that acquisition-based diversifications tend to use public financing sources while internally oriented diversifications rely on private sources. A reciprocal relationship was found between financial strategy and diversification.

Financial management

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Construct validity of an objective (entropy) categorical measure of diversification strategy

Article Abstract:

The validity of the constructs involved in an objective or entropy measure of diversification strategy is tested using a model of structural equations. Convergent validity, as outlined in the Rumelt approach, and discriminant and criterion-related validity were strongly related to the entropy measure, thus supporting the latter's validity. Accounting and market performance are criterion-related validity indicators, while debt, size and research and development activities are discriminant validators. Coefficients of 0.87, 0.94 and 0.44 were obtained for the entropy, Rumelt and objective (SIC) measures, respectively. The results suggest that while either of the approaches would be sufficient, using both the entropy and Rumelt methodology for measuring diversification strategy would lead to more accurate results. The SIC measure, on the other hand, may be applied in limited cases.

Psychological aspects, Planning

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Strategic control systems and relative R & D investment in large multiproduct firms

Article Abstract:

Research suggests that large diversified M-form firms' tight financial controls lead to lower investment in research and development because of the short-term, low-risk orientation. Increasing the level of diversification affects research investments because of the different control systems required. Less-diversified U-form firms do more research investing than more diversified M-form firms. Related and unrelated business firms reported a negative relationship between research intensity and market performance, yet they did not invest as much in research as dominant business firms.

Analysis, Industrial research, Management research

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