MARKET COMPETITION, ARBITRAGE RISK, AND CAPITAL STRUCTURE: EVIDENCE FROM TAIWAN
Yu-En Lin (),
Hsiang-Hsuan Chih (),
Chia-Hsin Cheng and
Yan-Qing Ku ()
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Yu-En Lin: Business School, Jilin University, Jilin, P. R. China
Hsiang-Hsuan Chih: Department of Finance, National Dong Hwa University, Hualien, Taiwan, R.O.C.
Chia-Hsin Cheng: Department of Accounting, City College Wenzhou University, Zhejiang, P. R. China
Yan-Qing Ku: Business School, Wuyi University, Fujian, P. R. China
Annals of Financial Economics (AFE), 2016, vol. 11, issue 01, 1-11
The purpose of this paper is to understand how the product market competition and the arbitrage risk affects managers’ decisions on capital structure. To find managers’ risk preference, we introduce the interaction between market competition and the arbitrage risk of the firm. Sampling from Taiwanese listed companies from 1986 to 2011, we identify both the market competition and the arbitrage risk affects managers’ debt decisions. In addition, we find that most managers in monopolistic firms increase debt to decrease the agency costs. However, some hold risk-averse motivation to enjoy their “quiet life”. These “quiet life” managers exist in those companies that are in non-competitive markets and that exists large idiosyncratic risk.
Keywords: Market competition; arbitrage risk; capital structure; quiet life (search for similar items in EconPapers)
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