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Diversification, capital structure and profitability: A panel VAR approach11We are grateful to the editor and the anonymous reviewer for their valuable comments

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  • Jouida, Sameh

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).

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  • Jouida, Sameh, 2018. "Diversification, capital structure and profitability: A panel VAR approach11We are grateful to the editor and the anonymous reviewer for their valuable comments," Research in International Business and Finance, Elsevier, vol. 45(C), pages 243-256.
    • Handle: RePEc:eee:riibaf:v:45:y:2018:i:c:p:243-256
    DOI: 10.1016/j.ribaf.2017.07.155
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    More about this item

    Keywords

    Panel VAR; Diversification strategy; Capital structure; Profitability; Financial institutions;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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