Why? Probably (like Myers and Majluf's 1984 pecking order paper), the debt financing comes with better investor protections and if investors are not sure of what they are getting, this protection is more valuable.
SSRN-Modigliani and Miller Meet Chandler: Organizational Complexity and Capital Structure by Alberto Manconi, Massimo Massa:
"We show that organizational complexity is strongly related to stock market-based measures of information asymmetry - i.e., Amihud's (2002) illiquidity, Llorente et al.'s (2002) information asymmetry coefficient, the number of analysts tracking the firm, and the equity bid-ask spread. In line with the predictions of the pecking order theory, firms characterized by a more complex organizational structure resort less to equity and more to debt financing, have higher leverage, display a higher investment-cash flow sensitivity and hold more cash to finance future investment."Cite:
Manconi, Alberto and Massa, Massimo,Modigliani and Miller Meet Chandler: Organizational Complexity and Capital Structure(March, 14 2009). Available at SSRN: http://ssrn.com/abstract=1359762
2 comments:
Many thanks for mentioning our paper in your blog! This is not quite what we say, though. We claim that more complex firms will follow the pecking order more closely, i.e. issue more debt. We found it curious that something so conspicuous as organizational structure has been somewhat overlooked in the literature.
--Alberto Manconi
Right, that is what I thought I said. I reworded it to clarify it. Loved the article...in fact will be teaching it tonight in class!--jim
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