How capital structure influences diversification performance: A transaction cost perspective

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. Copyright © 2013 John Wiley & Sons, Ltd.     

COST,VALUE AND FOREIGN MARKET ENTRY MODE: THE TRANSACTION AND THE FIRM

This paper compares and contrasts the mode of foreign market entry decision from the transaction cost/internalization and organizational capability perspectives. Each of these perspectives operates at a different level of analysis, respectively the transaction and the firm, and consequently differs in the primary arena of attention, namely transaction characteristics and the capabilities of firms. In making the comparison, a key distinction is made between the cost and the value aspects in the management of know-how, based on which issues pertaining to the transfer of knowledge within and across firm boundaries and the exploitation and enhancement of competitive advantage are closely examined. The main purpose of this paper is to demonstrate the implications of a shift in frame from cost to value in the analysis of decisions related to firm boundaries. Entry into foreign markets is used primarily as a vehicle for the accomplishment of this purpose. The paper shows how the value-based framework of the organizational capability perspective radically and fundamentally shifts the approach towards the governance of firm boundaries and argues that, even though TC/internalization theory raises some valid concerns, the organizational capability framework may be more in tune with today’s business context. Some of the assumptions of the TC/internalization perspective, both direct—–opportunism, exploitation of existing advantage—and indirect—preservation of the value of know-how across locational contexts, asymmetry between bounded rationality for transaction and production purposes—are critically examined and questioned. Implications of a shift from a cost to a value-based framework are discussed and the need for a shift in research focus is emphasized. © 1997 by John Wiley & Sons, Ltd.     

AGENCY CONFLICT AND CORPORATE STRATEGY: THE EFFECT OF DIVESTMENT ON CORPORATE VALUE

Among the various stakeholders of a firm, senior managers are the most likely targets for private and public political pressures. Other stakeholder groups are less visible and may be perceived as less influential in corporate strategy formulation and implementation. In some situations, consequently, senior executives may adopt corporate strategies in response to political pressures even if these strategies may be costly to shareholders. In this study, a special case is examined: the effect of divestment of South African business units on firm value. Using data from 1984 through 1990, we examine the impact that announcements of divestments have upon the stock return behavior of publicly traded firms. Our results indicate that significant and negative excess returns accrue to shares of companies announcing divestments of South African operations. These results are supportive of the premise that noneconomic pressures may influence managerial strategies rather than value-enhancement goals. © 1997 by John Wiley & Sons, Ltd.     

AGENCY COSTS AND THE PERFORMANCE IMPLICATIONS OF INTERNATIONAL JOINT VENTURE INTERNALIZATION

Recent studies have examined the determinants of international joint venture (IJV) formations and stock market reactions to such investments. Less is known, however, about the evolution of IJVs and the attendant performance implications for parent firms. This paper examines one specific type of IJV evolution, IJV internalization, whereby one firm acquires the IJV by buying out its partner(s). Standard agency theory variables are hypothesized to influence parent firm valuation effects. The results indicate that parent firm valuation effects are positively related to the parent firm equity owned by insiders and the interaction of debt financing and free cash flow. © 1997 by John Wiley & Sons, Ltd.     

TOWARDS AN ATTENTION-BASED VIEW OF THE FIRM

The central argument is that firm behavior is the result of how firms channel and distribute the attention of their decision-makers. What decision-makers do depends on what issues and answers they focus their attention on. What issues and answers they focus on depends on the specific situation and on how the firm’s rules, resources, and relationships distribute various issues, answers, and decision-makers into specific communications and procedures. The paper develops these theoretical principles into a model of firm behavior and presents its implications for explaining firm behavior and adaptation. © 1997 by John Wiley & Sons, Ltd.     

Testing alternative theories of the firm: transaction cost,knowledge-based,and measurement explanations for make-or-buy decisions in information services

Firms boundary choices have undergone careful examination in recent years, particularly in information services. While transaction cost economics provides a widely tested explanation for boundary choice, more recent theoretical work advances competing knowledge-based and measurement cost explanations. Similar to transaction cost economics, these theories examine the impact of exchange attributes on the performance of markets and hierarchies as institutions of governance. These theories, however, offer alternative attributes to those suggested by transaction cost economics or offer alternative mechanisms through which similar attributes influence make–buy choices. Traditional empirical specifications of make–buy models are unable to comparatively test among these alternative theories. By developing and testing a model of comparative institutional performance rather than institutional choice, we examine the degree of support for these competing explanations of boundary choice. Hypotheses are tested using data on the governance of nine information services at 152 companies. Our results suggest that a theory of the firm and a theory of boundary choice is likely to be complex, requiring integration of transaction cost, knowledge-based, and measurement reasoning. © 1998 John Wiley & Sons, Ltd.     

Examining the performance effects of post spin‐off links to parent firms: should the apron strings be cut?

Little research has examined the performance implications of the parent‐child relationship post spin‐off. Although the parent provided oversight of the child prior to the spin‐off, effects of post spin‐off links to the child remain unclear. Applying transaction cost and agency theories, our study of 142 firms spun‐off between 1986 and 1997 examines how oversight and ownership by the parent firm influence stock market performance post spin‐off. We find that while child firms benefit from some links to the parent, having too many links is negatively related to performance. The findings suggest that there is a balance between having too much parental involvement and not enough. Our study extends understanding of post spin‐off child firm performance and provides valuable insights for both parent and child firms. Copyright © 2011 John Wiley & Sons, Ltd.     

Behavioral assumptions and theory development: the case of transaction cost economics

From a critical realist perspective, I discuss the role played by behavioral assumptions in organization theories, and use transaction cost economics as an illustrative example. Core behavioral assumptions often constitute the foundation of the mechanismic explanations of a theory, and thus should play a pivotal role in theory development. I distinguish between assumption‐based and assumption‐omitted theory testing, and show that empirical research in transaction cost economics has been dominated by assumption‐omitted testing. To establish a solid foundation for a new theory, management researchers should pay more attention to assumption‐based testing. Copyright © 2006 John Wiley & Sons, Ltd.     

AN EMPIRICAL TEST OF THE RESOURCE-BASED THEORY: STRATEGIC REGULATION IN THE DUTCH AUDIT INDUSTRY

The resource-based view of the firm is a recent strategic management theory that seeks to identify the resources that may provide firms with a sustainable competitive advantage. This paper has two purposes. First, the paper relates strategic management arguments to parallel lines of reasoning in industrial organization theory and argues that strategic regulation is a major source of sustainable competitive advantage. The second purpose of the paper is to report the results of an empirical test of the resource-based theory on the basis of a longitudinal data set on the postwar history of the Dutch audit industry. A key determinant of this history proves to be strategic regulation, which stimulates demand for audit services and protects rent-producing resources.