Capital structure and business failure: The collapse of Canada’s Dome Petroleum

In popular lore, the failure of Canada’s once-biggest company, Dome Petroleum, was caused by the interventionist policies of the federal government or its misadventures drilling for oil in the Arctic. But these factors acted in varied ways on the company. Rather, corporate finance theories offer more insight into the dynamics that led to Dome’s takeover by the American oil major Amoco in 1988. Dome was unique in its unwillingness to issue new share capital during its growth phase and instead relied on easy debt financing. This in turn was a result of both insider preferences as well as capital market imperfections. The transformation of capital structure from a background into a critical weakness, this paper argues, making use of newly available data and company archives, provides a more convincing explanation of Dome’s failure than other factors. The relevance of capital structure highlights the enduring analytic utility of the Modigliani-Miller theorem of capital structure irrelevance.