Impact of Corporate Strategy on Capital Structure:Chinese Companies (Research Paper Sample)

THE IMPACT OF CORPORATE STRATEGY ON CAPITAL STRUCTURE: AN EMPIRICAL ANALYSIS FROM CHINESE LISTED COMPANIES.
FOUNDATIONS OF RESEARCH IN ACCOUNTING & FINANCE
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Word count: 2334
Table of Contents TOC \o "1-3" \h \z \u CHAPTER ONE: INTRODUCTION PAGEREF _Toc80279587 \h 31.1: Background of the Study PAGEREF _Toc80279588 \h 31.2: Statement of the Research Problem PAGEREF _Toc80279589 \h 41.3: Research Objective and Hypothesis PAGEREF _Toc80279590 \h 41.3.1: Objective PAGEREF _Toc80279591 \h 41.3.2: Specific Objectives PAGEREF _Toc80279592 \h 41.4: Justification of the Study PAGEREF _Toc80279593 \h 5CHAPTER TWO: LITERATURE REVIEW PAGEREF _Toc80279594 \h 62.1: Empirical Review of Related Literature PAGEREF _Toc80279595 \h 62.2: Theoretical Framework PAGEREF _Toc80279596 \h 72.3: Conceptual Framework PAGEREF _Toc80279597 \h 8CHAPTER THREE: METHODOLOGY PAGEREF _Toc80279598 \h 93.1: Study Area/Population PAGEREF _Toc80279599 \h 93.2: Research Design and Sampling Procedure PAGEREF _Toc80279600 \h 93.3: Data Needs PAGEREF _Toc80279601 \h 103.4: Variables and Empirical Model PAGEREF _Toc80279602 \h 103.5: Data Collection and Analysis PAGEREF _Toc80279603 \h 113.6: Limitation of the Study PAGEREF _Toc80279604 \h 11REFERENCE PAGEREF _Toc80279605 \h 12APPENDIX PAGEREF _Toc80279606 \h 14Appendix 1: Work Plan PAGEREF _Toc80279607 \h 14
CHAPTER ONE: INTRODUCTION
The introduction chapter will provide information on the background of corporate strategy and its relation to capital structure. The statement of the problem, research objectives, and the importance of the current study will be assessed in this chapter.
1.1: Background of the Study
In the recent past, there has been a lot of debates that have fueled research towards corporate strategy. A lot of researchers including Bowen, 2007; Psillaki and Daskalakis, 2009; Bowman & Helfat, 2001 and Matemilola et.al, 2018 have reported that the strategy adopted by a firm influences the firm capital structure. Some have reported that some strategy fuel more debt to equity, while others lead to more equity (Yeyati and Micco, 2007). There has been debates on the strategies that fuels a balanced capital structure. The strategy of a firm dictates its long-term objective. According to the pecking and signaling theory, the strategies applied at different levels of the organization differ. Thus it is important to evaluate corporate decision, which could affect the capital structure since these decisions are made at the same level.
A lot of researchers have raised concerns as to the kind of impact the strategy would have on the financial structure of a firm. The strategy as well as the structure has a significant effect on long-term firm profits. There has been a lot of approaches applied to examine firm’s decision and choice of structure. Although there has been a lot to determine the factors that influence firm’s decisions, and mainly its structure, the element of corporate strategy and its relation to the structure has remained largely under researched.
Several studies that have ventured into the field have been limited in scope making most of the reported being based on anecdotal stories (Lowe et.al, 1994; Umer and Irum, 2013). Besides the subject has been subjective, and firms have largely relied on assumptions to relate the two subjects. Up until the work of Cappa, et.al (2020), researchers widely limited their focus to only one aspect of corporate strategy (corporate diversification) Bowen, F., 2007; Psillaki and Daskalakis, 2009; Bowman and Helfat, 2001; Matemilola et.al, 2018; Rizwanullah and Wu, 2020. The work of Cappa, et.al (2020), looked at integration, diversification, and internalization as major corporate decisions. This led to mix of results, leaving the subject largely ambiguous. The author realized that there has been a lot of changes and dynamics around the subject of corporate strategy and the factors that influence it. This necessitates for a need to examine the relation in the current business environment which fueled the current analysis.
1.2: Statement of the Research Problem
Owing to the dynamism in the current business environment, a lot need to be done and analyzed in relation to the impact corporate strategy has on a firm capital structure. Although there has been researches on the same, there has been a mix of results, and most have been based on anecdotal stories (Matemilola et.al, 2018). The subject has remained largely subjective, and with little attention. Besides, there has been little research based on empirical analysis which will lay bases to the current study. Also, such analysis has not been undertaken on Chinese listed firms despite the market been stable, efficient, and diversified in composition.
1.3: Research Objective and Hypothesis
1.3.1: Objective
The general purpose of the current study will be to assess the impact of corporate diversification, integration, and internalization strategies on firm capital structure making reference to sampled firms listed in the Shanghai Stock Exchange (SSE).
1.3.2: Specific Objectives
1 To characterize the corporate strategies and financial structure of Chinese listed companies
2 To assess the effect of Chinese listed companies’ corporate strategies decision on their capital structure.
1.4: Justification of the Study
The current study will be useful to a lot of stakeholders. First, it will be a key tool for further research as it will lay a bases to key characteristics and impact of corporate strategy decisions. It will thus be used as a literature review component to build on further research. Therefore, it will not only fuel future research but will also build into the body of research. The results especially on characterization will be useful to the Chinese listed firms. This is because the information will help the firms to benchmark on their competitors, and devise competitive advantage skills. Also the information will help improve their understanding on how a capital structure is influenced by the corporate decisions that are made within the firm. Besides, investors can also be able to rely on the results to make investment decisions based on companies with better structures.
CHAPTER TWO: LITERATURE REVIEW
The chapter will provide details on the past studies that have been done on the subject, theory behind the study, and a conceptual framework that links the variables of interest.
2.1: Empirical Review of Related Literature
There are studies that have been conducted on the subject of corporate strategy and its relationship to capital structure. According to Lowe et.al (1994), assessing the effect on Australian companies, the author made use of diversification as a major component of corporate decision. The analysis found that the most diversified firm’s corporate decisions had an impact on their capital structure. Although other factors like profits, rate of growth, and risk were measured, other components of corporate decision making were not assessed which the current study will seek to assess. Similarly, Rizwanullah and Wu (2020), making use of Pakistan companies used diversification strategies to assess the impact of corporate strategy on a firm capital structure. This was using the four major strategies (dominant, related firm, single, and unrelated). The authors found no relationship between the strategy adopted and the capital structure adopted by the firm. On the other hand according to Umer and Irum (2013), capital structure is highly influenced by the strategies a firm takes to achieve its long-term objectives.
According to Cappa et.al (2020), the capital structure of a firm will show the level of equity and debt a firm will be taking. The structure vary from firm to firm as they try to strike a balance between their equity stock, preferred stock, and debt. The main challenge has been to identify the optimal level. Most firms will make use of signaling theory to be able to make investment decisions. This will all rely on the goals and objectives of the firm (Mac et.al, 2010; Bowman and Helfat, 2001). The strategy will determine a firm’s competitive ability thus it’s all about the firm’s ability to diversify and capture the market. According to Cappa et.al (2020), corporate strategy entails diversification, and vertical integration. According to Rizwanullah and Wu, (2020) concentration, diversification, and integration have a key role to play in the formation of a firm capital structure. This are the major strategies undertaken at the corporate level.
Corporate strategies are flows and processes in a business to help achieve a firm objectives. It is through the strategy the firm business, policy, and stakeholders are revealed. It is also seen as the processes having influence on a firm portfolio (Rizwanullah and Wu, 2020). Thus, the more a company is diversified, the more its decisions will be influenced. According to Yeyati and Micco, (2007) the corporate level strategy is irrelevant to decisions pertaining a firm capital structure. However, Matemilola (2018) aalleged that diversification had an impact on the structure of the firm. Research has shown that there is a positive link between risk and financing. Firms with high risk have high level of leverage. Diversification is seen as a measure of risk, with diversified firms having lower risk. Consequently, diversification ought to impact on the level of debt a firm would hold. Psillaki and Daskalakis, (2009) found that diversified firms have more debt capacity, hence found a negative relation. Diversification major proxy is use of specialization ration...