Capital Structure and Its Effect on Firms Value and Competitiveness in the Market: The BBBY Example

Abstract

After covid-19, almost every industry is competitive. Choosing an optimal capital structure can directly determine a firm’s survival. This paper mainly investigates how capital structure impacts a firm’s enterprise value and its competitiveness in an industry, focusing on Bed Bath & Beyond (BBBY) as a case study. This paper mainly integrates insights from different economic theories and other researchers’ empirical research results to analyze how BBBY’s conservative capital structure – characterized by substantial cash holdings and minimal debt – affects its firm value and competitiveness stance. The finding suggests that even though BBBY’s conservative capital structure (holding large amounts of cash and almost no debt) ensures stability, it potentially reduces its firm's value and limits market responsiveness for three reasons. First, holding large cash is wasteful and has a large opportunity cost. Second, having no debt would lose the opportunity of taking advantage of the tax benefit that debt brings. Third, the conservative structure would potentially cause shareholder’s dissatisfaction. And increasing a reasonable amount of debt and controlling cash holding can enhance BBBY’s strategic flexibility and competitiveness edge.