The capital structure implications on innovation

FinanceFreedom

In one paper, a researcher argues that consideration of firm strategy can help illuminate the choices managers make between debt and equity financing. Within an industry, the form of competition that each firm chooses will determine the strategic value to the firm of maintaining financial slack. The empirical analysis yields strong support for the proposition that financial slack should be a particularly critical strategic imperative for firms pursuing a competitive strategy premised on innovation. The researcher also demonstrates that firms pursuing such a strategy that fail to recognize the value of financial slack are likely to perform poorly.

 

References:

O’Brien, J. P., 2003. The capital structure implications of pursuing a strategy of innovation. Strategic Management Journal 24 (5), 415–431.

Available at: http://onlinelibrary.wiley.com/doi/10.1002/smj.308/abstract

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