Capital Structure is the particular mix of debt and equity used by a company to finance its overall operations and growth. There is an optimal capital structure for a given firm, that is the mix of debt and equity financing matters. The optimal capital structure is the optimal mix of debt and equity financing that lowers the firm's overall weighted average cost of capital and maximizes its value. Corporate Strategy is a portfolio approach to srategic decision making. It takes a look across all the firm's businesses to assess how to create the most value. To develop a corporate strategy, a firm must investigate how the various pieces of the business fit together, how they impact each other, and how the parent company is structured, in order to optimize human capital, processes, and governance. Corporate strategy builds on top of business strategy which is concerned with the strategic decision making for an individual business.
Is there a connection between Corporate Strategy and Capital Structure?
To answer this we need to understand how capital structure can influence management decisions. Imagine a company that is majorly debt-funded. Who will approve their expansion strategy? If it is a VC-funded startup, who will drive the same decisions? The most interesting thing to study is the underlying power structures and ( consequently the value structures) which drive the decisions and hence the strategy. Is there a relationship? Yes. But the relationship depends on the power structure.
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There has to be a the strategy has to be acceptable to the major stakeholders, which change according to the structure. A self-led organisation will likely develop a very different set of strategic options to one that is classically top down. Frederic Laloux's work may be of interest.
The optimal capital structure for a given firm exists only in theory. It is an illusion in modern finance theory. The debt to equity ratio is without any logic in practice, because the most important is the differentiation between short and long-term debt. Therefore, long term engaged assets (inventories and short-term receivables) should be long term financed. To achieve this principle, the difference between actual net working capital and net working capital that is needed, is crucial. This is called “capital adequacy” of the company. This difference means a surplus or a deficit of net working capital. Its movement shows the movement of the solvency risk of a company. Maintaining liquidity and solvency of the company is a prerequisite for a sound based corporate strategy. More about capital adequacy, you can find on:
https://www.hrvatski-racunovodja.hr/pub/2018/rim-2018-zbornik-znanstvenih-radova.pdf. (Živko Bergant)
I agree with the previous speakers, and in particular with the theses of Dr. Živko Bergant and Dr. Sridhar Mulakaluri. My practical experience as an analyst and financial controller as well as research in the field of joint-stock companies listed on the Warsaw Stock Exchange (Poland) shows that company owners who have controlling blocks of shares or almost completely control the share capital of the financing structure almost never they are addicted to development strategy. In my country, business owners most often entered the stock exchange with an already formed company in a specific market in order to obtain as much and as soon as possible capital for an IPO. The development strategy and, within its framework, the financial strategy were generally a propaganda document, a kind of a wish-concert, containing ambitious goals, allegedly guaranteeing high profitability and high return on invested capital within 3 to 5 years. The majority of new companies in the period 2004-2011 failed to achieve their strategic goals, their share prices fell significantly below the IPO price and very often they were entities suspended or withdrawn from listing on the regular market of the stock exchange. The following companies are examples of such disappointed opportunities of transferred companies, but also wasted capital of stock exchange investors: PBG SA, IQ Partners, and Petrol Invest. Best regards
Thank you all (Sridhar Mulakaluri, Emmanuel V. Murray, Tariq Kadhim, Sitara Karim, Anthony de Sigley, Zivko Bergant, and Dariusz Tomasz Grala) for your inputs.
The simple answer to this Question is of course a resounding "YES" ! Capital Structure is, and should always be, an integral part - amongst many other things of course - of Cotrporate Strategy.
No corporation really worth its name will dare to ignore:-
- Amount of.....
- Type of........
- Conditions pertaining to, and
- Several other facets
of Capital Structure.
To say more about this corelationship can extend to the writing of a big, long, book.....and indeed the exercise has been carried ouity many times.
بالطبع رأس المال جزء لا يتجزاء من اي استراتيجية لأي مؤسسة, ولأن رأس المال من العوامل المؤثرة على نجاح أي عمل اقتصادي.
All responses must be in English. Whoever posted a response in Arabic must delete it and repost it in English. This site uses only the English language.
https://www.jstor.org/stable/2486694
https://www.jstor.org/stable/2723892
https://www.jstor.org/stable/2487801
https://www.jstor.org/stable/3094048
Corporate Strategies like Liquidity, Firm Size, Firm Growth, can affect the capital structure, because when the corporate strategy is good, corporate tends to less in debt
Yes, there is a connection. Capital structure is a financing decision which is a mix of debts and equity. Therefore, whatever proportion of debts or equity choose by the management is one corporate strategy for enhancing the corporate goals of the firm..
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