If a state can choose between arming itself (by extracting resources from its domestic constituents) or seeking allies who will pledge military resources to that state, does there exist an optimal ratio of its own arms to its allies' arms? This question is pursued by analogy with a corporation's ratio of debt to equity in its capital structure. Classical finance theory suggests two propositions which, if applicable to alliances, imply that there is no optimal ratio, but allies will expect greater returns from the alliance if the ratio rises. Recent theories in finance imply that the arms to allies ratio does matter and should decrease in response to increases in either the domestic costs associated with arming or the riskiness of the state's military situation. These propositions are tested using Correlates of War (COW) data. The results do not support the classical arguments as to the irrelevance of the arms to allies ratio and suggest that this measure of military capital structure responds to risk.
