Business strategy and capital structure: the effect of contingent fit on firm performance  

Oleh:

Noto, Mulyadi

Jenis: Article from Proceeding
Dalam koleksi: Proceeding IConEnt 2016 (International Conference on Entrepreneurship) : How Innovation could Improve the Performance and Productivity in Entrepreneurship?, page 1-24.
Topik: Business Strategy; Capital Structure; Contingent Fit; Contingent Misfit; Return on Equity; Assets Utilization Ratio; Price Premium Ratio.
Fulltext: Mulyadi Noto.pdf (725.56KB)

Isi artikel

The objectives of this study are to investigate whether business strategy has an impact on firm’s capital structure decisions and to investigate whether contingent fit between business strategy and capital structure influences the achievement of firm’s performance. In addition, this study also investigates the impact of capital structure choices on firm’s performance. Therefore, this study examines the proposition of logical interrelation among business strategy, capital structure and firm’s performance. This study starts from the proposition that the decision on the composition of debts in capital structure (financial leverage) is one of strategic managerial decisions. This strategic decision should be made in the framework of business strategy chosen by management. Different business strategy will form different capital structure. Both capital structure and business strategy must be aligned so that the implementation of business strategy will effectively increase the firm performance. Thus, the alignment between the two will form a contingent fit (misfit) that will encourage (discourage) the firm performance. Using 2008 and 2009 data from 31 public firms registered at BEI, this study regresses (1) business strategy toward capital structure, (2) capital structure toward firm performance and (3) contingent fit/misfit toward firm performance. Partially the hypotheses proposed in this study are supported. First, this study provides evidence that firms with Differentiation strategy orientation will have lower debts to total assets ratio in their capital structure. Second, higher level of debts in capital structure is associated with lower level of firm performance. Finally, contingent fit between Low Cost business strategy orientation and capital structure with High Level of Debts has a positive influence on Firm Performance. Considering the limitations of study, the results of this study provide preliminary empirical evidence of the validity of strategic and logic interaction among the three constructs: Business Strategy, Capital Structure and Firm Performance.

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