Cost Structure and Capital Structure – A Test of the Stakeholder Theory of Capital Structure

47 Pages Posted: 15 Mar 2012 Last revised: 19 Oct 2014

See all articles by Qianqian Du

Qianqian Du

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Rui Shen

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics; Shenzhen Finance Institute

Date Written: July 20, 2014

Abstract

The stakeholder theory of capital structure proposed by Titman (1984) argues that firms will take into account the nonfinancial stakeholders’ preferences when making capital structure decisions. In particular, firms selling specialized products will choose a lower leverage ratio. We propose a cost structure measure to capture the uniqueness of products. We document that this single factor can explain about 16 to 23% of the cross-sectional variation in capital structure. A one standard deviation increase in the cost structure variable relates to an 8 to 10% decrease in the debt ratio. The association is stronger among firms with a higher expected default probability. The results are robust to using the instrumental variable (IV) method. We further discuss three underlying mechanisms: customers’ channel, suppliers’ channel and employees’ channel, through which the cost structure variable captures stakeholders’ concerns. We conclude that, consistent with the stakeholder theory, cost structure has a causal impact on a firm’s leverage choices and is one of the most important determinants of capital structure in the cross-section.

Keywords: Capital Structure, Stakeholder Theory, Cost Structure

JEL Classification: G32

Suggested Citation

Du, Qianqian and Liu, Laura Xiaolei and Shen, Rui, Cost Structure and Capital Structure – A Test of the Stakeholder Theory of Capital Structure (July 20, 2014). Available at SSRN: https://ssrn.com/abstract=2021748 or http://dx.doi.org/10.2139/ssrn.2021748

Qianqian Du

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Laura Xiaolei Liu (Contact Author)

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.pku.edu.lauraliu.cn/en-home.html

Rui Shen

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics ( email )

2001 Longxiang Road, Longgang District
Shenzhen, 518172
China

Shenzhen Finance Institute ( email )

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
668
Abstract Views
3,917
rank
54,331
PlumX Metrics