Publication Type

Journal Article

Publication Date

7-2013

Abstract

Extant theories agree that debt should inhibit diversification, but predict opposing performance consequences. While agency theory predicts that debt should lead to higher performance for diversifying firms, transaction cost economics (TCE) predicts that more debt will lead to lower performance for firms expanding into new markets. Our empirical tests on a large sample of Japanese firms support TCE by showing that firms accrue higher returns from leveraging their resources and capabilities into new markets when managers are shielded from the rigors of the market governance of debt, particularly bond debt. Furthermore, we find that the detrimental effects of debt are exacerbated for R&D intensive firms, and that debt is not necessarily harmful to firms that are either contracting or managing a stable portfolio of markets.

Keywords

Transaction cost economics, diversification, capital structure, RBV, Agency Theory

Discipline

Strategic Management Policy

Research Areas

Strategy and Organisation

Publication

Strategic Management Journal

Volume

35

Issue

7

First Page

1013

Last Page

1031

ISSN

1097-0266

Identifier

10.1002/smj.2144

Publisher

Wiley

Additional URL

http://dx.doi.org/10.1002/smj.2144

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