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

Abstract

This study examines the relationship between corporate strategy and capital structure, specifically the diversification and financing strategies of a firm. The results show that equity financing is preferred for related diversification and unrelated diversification is associated with debt financing Additionally, firms diversifying through acquisitions are more likely to use public sources of financing and those emphasizing internal development of new businesses depend primarily on private sources of financing. Using simultaneous equation estimation, we found a reciprocal relationship between a firm's financial strategy and its corporate diversification strategy. Mode and nature of diversification are also reciprocally interrelated. © 1998 John Wiley & Sons, Ltd.