Barton And Gordon Case Analysis

Barton & Gordon (1988) investigated whether “a corporate strategy perspective may complement the traditional financial paradigm in explaining capital structure”. They suggest that next to factors from the financial paradigm and firm specific variables, the capital structure at firm level may partially be explained by behavioral aspects such as managerial choice.

Figure 1: Barton, S.L. & Gordon, P.J. 1988, "Corporate Strategy and Capital Structure", Strategic Management Journal, vol. 9, no. 6, pp. 623-632. (Strategic Management Journal is part FT 45 Journal list and as a 4 rating on ABS for both 2009 and 2010.

The understanding of the construction of the capital structure before Barton & Gordon (1988), is represented in figure 2. The equity/debt ratio was thought to be influenced only by the contextual financial paradigm and firm specific variables.

Figure 2: Understanding of factors that influence equity/debt ratio before Barton & Gordon (1988)

The contribution of Barton & Gordon (1988) rests in suggesting variables and interaction based on a corporate strategy framework that appears to hold promise in pursuing a behaviorally based theoretical explanation of capital structure decisions. Using the

They agreed that the literature about financing diversification and thus, diversification choices, was largely unexplored. Prior research on capital structure, in fact, already focused on the combination of equity and debt, without deepening the effects of different source of financing. Kochhar & Hitt (1998) suggested that the financing sources can mitigate the risk of a firm from mode entry in case of large diversification; the costs generated by the information asymmetry often existing between the manager and the financing sources can be reduced by selecting the appropriate source of financing (Figure