Does diversification strategy matter in explaining capital structure? Some evidence from Spain

Eduardo Menendez-Alonso

Applied Financial Economics, 2003, vol. 13, issue 6, 427-430

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.

Date: 2003
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DOI: 10.1080/09603100210150930

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