<p>Slide 2 Dynamism, Capital Structure and Innovation</p><p>PURPOSE: Hypothesize an interaction between environmental dynamism and capital structure, with firm innovation. RESULTS: Empirical tests show that for firms in dynamic environments, high levels of debt are negatively related to innovation, and in stable environments, high levels of debt are positively related to innovation.</p><p>Slide 3 WHY? Evidence indicates that U.S. firms are losing their competitive advantage within the global economy. Need to integrate Strategic Management and Financial Management</p><p>Slide 4 Global Competitiveness Report Cover</p><p>Slide 5 Global Competitiveness Report: In 2000 we ended the century second to Finland in competitiveness. The Council on Competitiveness and the National Institute of Standards and Technology argue that we are living off our historic advantages. Investment in the fundamentals of innovative capacity have declined.</p><p>Slide 6 Schumpeter (1950) innovation is the essence of change, both destroying and creating markets and organizations (creative destruction). As an element of strategy, it is a means of erecting barriers to competition, and creating sustainable competitive advantage (Porter, 1990)</p><p>Slide 7 Innovation: An organizational commitment to the development of dynamic capabilities that are employable within the firm’s competitive environment. This definition incorporates the current thinking in strategic management that has placed more emphasis and importance on innovation as a means to develop and maintain competitive advantages (Bettis & Hitt, 1995). </p><p>Slide 8 Theoretical Foundation: Transaction Cost Economics Hierarchical control is seen as a substitute for market efficiencies. Environmental Dynamism Environmental dynamism result in actors’ inability to assess accurately both the present and future state of the environment.</p><p>Slide 9 Theoretical Foundation: In dynamic environments external stakeholders will have difficulty evaluating managers’ actions. Therefore, hierarchies are needed as substitute for markets.</p><p>Slide 10 Proposition: The interaction between environmental dynamism and capital structure will influence firm innovation. More specifically, H1: in a dynamic environment, lower leverage will lead to greater innovation H2: in a stable environment, higher leverage will lead to greater innovation</p><p>Slide 11 METHODOLOGY Variables Innovation: patent data provided by CHI Research • number of patents • technological strength of the patent Dynamism: standardized index based on value of industry shipments (Boyd, 1995; Keats & Hitt, 1988) </p><p>Slide 12 METHODOLOGY Variables Leverage: Ratio of debt to equity Controls: • Size • R&D Slide 13 METHODOLOGY Setting: • 197 large manufacturing firms • Across industry Data from Compustat</p><p>Slide 14 METHODOLOGY Analytical Approach: Multiple regression with an interactive term between leverage and environmental dynamism </p><p>Slide 15 Anything you want to add, like the stats tables and the figure. I don’t use the stats stuff in class – no one understands the conversation. I can put them on a slide if you wish.</p><p>Slide 16 DISCUSSION Agency Theory & Debt are not generalizable Overemphasis on financial controls can negatively impact long-term investments in innovative activities Stakeholders can not always understand the relevance of managers’ moves Governance inseparability: can contribute to a loss of competitive capability</p><p>Slide 17 DISCUSSION Limitations: • Sample only large manufacturing firms • Other types are also innovative</p><p>Slide 18 CONCLUSION It is necessary that we re-examine the basis for applying finance-based techniques which provide short-term rewards at the expense of long-term survival</p>