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Does diversification strategy matter in explaining capital structure?

April 26, 2017Capital diversification explaining strategy structure

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Does diversification strategy matter in explaining capital structure?

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Author InfoEduardo J. Menéndez-Alonso Abstract The aim of this article is to study the effect of diversification strategy on firm capital structure using a panel data analysis for a sample of 480 Spanish manufacturing firms during the period 1991-1994. Co-insurance effect and transaction cost arguments help to explain a positive relation between firm debt ratio and firm diversification, while agency theory predicts a negative relation. This study did not find a significant relationship between firm leverage and the degree of firm diversification, using different debt ratios, and the revenue-based Herfindahl index and the entropy measure as proxies of firm diversification. This evidence contrasts with previous studies for American and Australian markets that suggest a positive relation, according to co-insurance effect and transaction cost explanations. Download InfoTo download: If you experience problems downloading a file, check if you have the proper application to view it first. Inf