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Strategic Management Journal
Strat.Mgmt. 21: 31-49 (2000) J.,
ENVIRONMENTAL DYNAMISM,CAPITAL STRUCTUREAND PERFORMANCE: A THEORETICAL AND AN INTEGRATION EMPIRICAL TEST L12* ROY L. SIMERLY' and MINGFANG 1School of Business, East Carolina University, Greenville, North Carolina, U.S.A. 2College of Business Administration and Economics, California State University, Northridge, California, U.S.A.
An ongoing argument in financial managementhas been how to craft a capital structurewhich maximizes shareholder wealth. This question has gained prominence within the strategic managementfield because of the apparent link between capital structure and the ability of firms to compete. By integrating models from organizational economics with the strategic management literature, we are able to theorize that a firm's capital structure is influenced by environmental dynamism, and that the match between environmental dynamism and capital structure is associated with superior economic performance. Our large-scale empirical analyses provide supportive evidence for the proposition that competitive environments moderate the relationshipbetween capital structureand economic performance.From a theoretical standpoint, these findings provide another link between capital structure and corporate strategy. More importantly,we are able to move the discussion beyond the limitations of financial risk and incorporatethe strategy concept of decision making under uncertainty.For practical application, these findings offer informedadvice for managers on how to craft a capital structure.Copyright ? 2000 John Wiley & Sons, Ltd.
A relatively new and importantarea of strategy research has been examining the relationship between a firm's capital structureand factors related to the ability of firms to compete (e.g., Balakrishnan Fox, 1993; Bartonand Gordon, and 1988; Bromiley, 1990; Kochhar, 1996; Kochhar and Hitt, 1998; Porter, 1992). Capital structure has long been an important issue from a financial economics standpointsince it is linked with a firm's ability to meet the demands of various stakeholders(e.g., Modigliani and Miller, 1958, 1963). It is an equally importantconcept for Key words: environmental dynamism; organizational economics; capital structure; strategy; firm performance to: *Correspondence Professor MingfangLi, College of Business Administration...