Alignment of Capital Structure to the Requirements of the General Strategy

Abstract

This paper deals with cardinal concepts in the field of economic theory and business management: capital structure and strategy. Although there are a number of papers dealing with these concepts, the relationship between the capital structure and strategies is still an under-explored area. Despite the fact that there is a two-way influence between them, this paper attempts to explain why a particular strategy choice requires adjusting the capital structure. Relevant theories, concepts, and numerous empirical studies were used for this purpose. The mismatch between the elements of the business and financial strategy can lead not only to a decrease in the value of the company but also to its liquidation. The focus of this paper is on general (grand or corporate) strategies related to the enterprise level. There are three basic types of general strategies: 1) growth strategies; 2) stabilization strategies; and 3) retrenchment strategies. Consequently, this paper is structured to show how the capital structure adapts to the specific requirements of these three types of general strategies. Understanding the relationship between strategy and capital structure is essential for achieving and maintaining competitiveness, especially in a rapidly changing context.