Multidivisional structure and capital structure: The contingency of diversification strategy

Abstract

Abstract This study examines the relationship between the implementation of the multidivisional (M‐form) organizational structure, capital structure and diversification strategy. Findings indicate that implementation of the M‐form structure from a hierarchical (U‐form) structure is associated with a general increase in the long‐term debt‐to‐equity ratio for all firms, a result that supports a free‐cash‐flow argument for the use of debt in restructuring to reduce the opportunism of management. Further, as implied by arguments from transaction cost economics, the debt‐to‐equity ration differs for different types of diversification strategy.