Capital Structure and Flexibility: Danish Exporters During the Cartoon Crisis
How does capital structure affect firms' flexibility to adapt to changes in their environment? We study the boycott of Danish products in Muslim countries in response to a Danish newspaper publishing caricatures of prophet Muhammad. Using detailed data on Danish exporters, we exploit variation in their capital structure and exposure to Muslim countries to analyze the effect of leverage on firms' response to the boycott. We find that only firms with low leverage compensate for lost demand by increasing investment, introducing new products and entering new markets. In contrast, high-leverage firms reduce sales and employment and decrease operating risk by turning to more flexible arrangements, in particular outsourcing. Our findings confirm that debt limits firms' flexibility, consistent with the importance of this consideration for capital structure decisions.
Benjamin Friedrich, Michal Zator
Friedrich, Benjamin, and Michal Zator. 2019. Capital Structure and Flexibility: Danish Exporters During the Cartoon Crisis.