A Theory of Corporate Scope and Financial Structure

David Daokui Li

98 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Analysis and Corporate Governance Merger and Competition Analysis

Abstract

ABSTRACT We simultaneously address three basic issues regarding the corporation: the optimal scope of operation, the optimal financial structure, and the relationship between these two. The starting point is that financial structure serves as a bonding device on the managers' self‐interest behavior. The effectiveness of this bonding depends on the distribution of the firm's future cash flow, which in turn depends on the firm's scope. Our theory also links the firm's investment decisions to its operation scope. As empirical implications, the theory reconciles the failure of the 1960s U.S. conglomerates with the success of the Japanese Keiretsu.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1977Determinants of corporate borrowing 1986The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration 1996Agency costs of free cash flow, corporate finance, and takeovers 1984Financial Intermediation and Delegated Monitoring 1975Markets and Hierarchies 1988Financing Constraints and Corporate Investment 1993Economics, Organization and Management.

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