Diversification, capital structure and profitability: A panel VAR approach11We are grateful to the editor and the anonymous reviewer for their valuable comments
Sameh Jouida
Research in International Business and Finance, 2018, vol. 45, issue C, 243-256
Abstract:
This study investigates the dynamic relationship between diversification, capital structure and profitability. Previous empirical studies have not considered the dynamics of this relationship, the endogeneity problem and causality factors. To overcome these econometric problems simultaneously, I build a panel vector autoregression model (PVAR) for 412 French financial institutions over ten years. There is some evidence of reverse causality between these variables after controlling the individual fixed effects. Moreover, there are an inverse bidirectional causal relation of profitability with leverage and diversification. The condition of stability is not confirmed for the relationship between diversification and leverage, but it is proved for the three factors observed simultaneously. The forecast error variance decompositions confirm the choice of the diversification as the most endogenous variable. Impulse response functions illustrate significant dynamic interrelationships in the financial sector. Our findings are robust across several measures of activity and geographic diversification (Entropy and Herfindahl-Hirschman index).
Keywords: Panel VAR; Diversification strategy; Capital structure; Profitability; Financial institutions (search for similar items in EconPapers)
JEL-codes: C33 G21 G32 L25 N23 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:45:y:2018:i:c:p:243-256
DOI: 10.1016/j.ribaf.2017.07.155
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