In progress Does financing influence firm strategy and competition? A long-term perspective

ERIM PHD 2009 F&A 02 AdJ


This project empirically investigates the impact of different corporate strategies and competition on the capital structure of Dutch firms. Finance and strategy have traditionally been two areas of research that were studied separately. There is however an increasing call for integration between finance and strategy research as several scholars have argued that financial decisions have strategic importance and a strategic perspective is thought to facilitate a more eclectic and realistic assessment of the capital structure puzzle (Barton and Gordon, 1987; Bromiley, 1990; Kochhar, 1996; Myers, 2001). This project responds to this call by examining whether firms’ capital structure is related to their corporate strategy for a selection of large Dutch firms from 1948 till 2003.


Capital structure; financing choice; corporate governance; bank financing; business history

Time frame

2009 - 2013


How do firms make financing decisions? Why do some firms have more debts in their financial structures and others more equity? These questions have boggled the minds of chief financial officers and academics alike since the early corporations were raised.


In 1958 Modigliani and Miller initiated an economically founded theory of capital structure choice by forwarding their irrelevance theorem based on perfect world assumptions and the mechanism of arbitrage. Over the course of time other financial economists have added to their model and bankruptcy costs, taxation effects and agency issues are now the common explanations for a firm’s capital structure.


Empirical tests of these theories estimate the determinants of capital structure or financing choices and often find evidence corroborating some theoretical predictions, but refuting others. Initial evidence for US firms has recently been extended by a large body of international work (Rajan and Zingales, 1995; Booth et al., 2001; Fan et al., 2006; and De Jong et al., 2008). These studies find that country factors – macro-economic conditions plus legal and institutional settings – influence the determinants of capital structure choice.  


The effects of macro-economic factors and institutional characteristics also feature in research on past financing decisions. Several papers on the late 19th and early 20th century describe capital structures (Ramirez, 1995; Rajan and Zingales, 2003; Franks et al., 2006 and Fohlin, 2006). A unique study on determinants of capital structure using early 20th century data is DeLoof and Van Overfelt (2008) on pre World War I Belgium. The authors have 556 firm-year observations in the 1905-1909 period and estimate the effects of market-to-book ratio, tangibility, profitability, size, age and firm-bank relations on debt-to-assets ratios. In a setting with poor investor protection, a booming stock market and neutral corporate taxes, the determinants of leverage closely resemble theoretical predictions and prior US evidence. The authors confirm the validity of modern capital structure theory, before formalization and publication of the theories.


This project proposes a critical assessment of established capital structure theories, in two directions. First, using a long time frame, we investigate the stability of capital structure determinants over a period of one century. In addition we aim describe the evolution of leverage and the determinants of leverage over time. Next, we aim to explain changes in levels and determinants of capital structure from institutional characteristics, such as shareholder right protection and the role of banks and public capital markets.


Second, we study a period before the contemporary capital structure theories have been developed and describe earlier theories and practically applied heuristics (rules-of-thumb). This analysis allows for a test of the influence of theory, theory formation and simple rules-of-thumb on corporate decision making. We describe whether financial decision-makers as rational economic agents obey theory independent of the work of financial economists, as in DeLoof and Van Overfeld (2008), or whether research and education influence capital structure choice (Frank and Goyal, 2007).


The Netherlands is an excellent setting for this project because high-quality data is available since 1903. Moreover, the Netherlands have experience several significant institutional changes in the 20th century and in the period before the Second World War Dutch academics actively debated optimal financing choices. In the Dutch academic society financial structure has always been a hotly debated topic. For example, in his dissertation Eenige grondslagen voor de financiering der onderneming, Polak (1932) argues that the choice between different financing types depends on the turnover speed of firms’ assets. Fixed assets have low turnover and should be financed with permanent capital, or at least capital with along duration. Liquid assets, with a short turnover, should be financed with capital of shorter duration (debt). The ‘golden rule’ of firm financing is matching maturity of capital to turnover of assets. For this reason liquidity is cited as the most important determinant of capital structure choice (Polak, 1932; Meij, 1946). Although the modern capital structure theories are presented in academic journals in English in the 1960s, in the Netherlands the traditional rules remain the core of the curriculum in Dutch universities. For example, a popular text book is Bouma’s Leerboek der bedrijfseconomie, deel II, theorie van financiering van ondernemingen, which is first published in 1971 and had the third issue in 1991. In this book, even the 1991 edition does not cite Modigliani and Miller (1958), nor any of the subsequent contributions.



Booth, L., Aivazian, V., Demirguc-Kunt, A., and Maksimovic, V., 2001, Capital structure in developing countries, The Journal of Finance 56, pp. 87-130.

Bouma, J.L., 1971, “Leerboek der bedrijfseconomie, Deel II: De theorie van de financiering van ondernemingen”, Wassenaar

De Jong, A., Kabir, R. and Nguyen, T.T., 2008, Capital structure around the world: the roles of firm- and country-specific determinants, Journal of Banking and Finance 32, 1954-1969.

Deloof, M. and W. van Overfelt, 2008, Were Modern Capital Structure Theories Valid in Belgium Before World War I?, Journal of Business Finance & Accounting 35, 491–515.

Fan, J., Titman, S., Twite, G., 2006. An international comparison of capital structure and debt maturity choices. Working Paper.

Frank, M.Z. and Goyal, V.K., 2007, Corporate leverage; how much do managers really matter?, Working paper..

Franks, J., C. Mayer and H.F. Wagner, 2006, The Origins of the German Corporation – Finance, Ownership and Control, Review of Finance, Vol. 10, No. 4.

Fohlin, C., 2006, Finance Capitalism and Germany's Rise to Industrial Power: Corporate Finance, Governance, and Performance from the 1840s to the Present (Cambridge: Cambridge University Press).

Meij, J.L., 1946, Weerstandsvermogen en financiële reorganisatie van ondernemingen, Elsevier, Amsterdam.

Modigliani, F. and Miller, M.H., 1958, The cost of capital, corporate finance, and the theory of investment, American Economic Review 48, pp. 655-669.

Myers, S.C., 1984, The capital structure puzzle, The Journal of Finance 39, pp. 575-592.

Polak, N.J., 1932, Eenige grondslagen voor de financiering der onderneming, 5de herziene druk, De Erven F. Bohn, Haarlem.

Rajan, R.G. and Zingales, L., 1995, What do we know about capital structure? Some evidence from international data, The Journal of Finance 50, pp. 1421-1460.

Rajan, R.G. and Zingales, L., 2003, The Great Reversals: The Politics of Financial Development in the 20th Century, Journal of Financial Economics, 69, pp. 5-50.

Ramirez, C.D., 1995, Did J. P. Morgan’s Men Add Liquidity? Corporate Investment, Cash-Flow and Financial Structure at the Turn of the Twentieth Century., Journal of Finance, Vol. 50, No. 2, pp.661-678.


Abe de Jong
Professor of Corporate Finance and Corporate Governance
  • Promotor