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Product Market Competition and Capital Structure of Firms: The Indian Evidence

Author

Listed:
  • Sumitra Naha

    (Department of Economics, Siliguri Mahila Mahabidyalaya)

  • Malabika Roy

    (Department of Economics, Jadavpur University)

Abstract

The present study intends to analyze empirically to what extent product market competition that a firm faces in a developing country like India, affects its capital structure decisions. The product market behaviour is captured from three different angles viz. structure-conduct-performance. We examine the impact of market structure, conduct and performance on both the short-term and long-term debt ratios separately, after controlling for the other determinants of capital structure. A new feature of the study is to underscore the role of economic liberalization in this respect. The method used is panel regression analysis. It is observed that the structure and conduct is significant in influencing only the short-term debt ratio whereas performance is consistently having a negative impact on both short-term and long-term debt ratios. The structural break dummy is also significant irrespective of the maturity structure of debt.

Suggested Citation

  • Sumitra Naha & Malabika Roy, 2011. "Product Market Competition and Capital Structure of Firms: The Indian Evidence," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(2), pages 140-153, July.
    • Handle: RePEc:jqe:jqenew:v:9:y:2011:i:2:p:140-153
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    References listed on IDEAS

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    4. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-435, June.
    5. Faure-Grimaud, Antoine, 2000. "Product market competition and optimal debt contracts: The limited liability effect revisited," European Economic Review, Elsevier, vol. 44(10), pages 1823-1840, December.
    6. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-347, May.
    7. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
    8. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1433-1466.
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    Cited by:

    1. Mahmoud Moeinaddin & Shahnaz Nayebzadeh & Masoumeh Ghasemi, 2013. "The Relationship between Product Market Competition and Capital Structure of the Selected Industries of the Tehran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(3), pages 221-233, July.

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    More about this item

    Keywords

    market structure; conduct; performance; capital structure; liberalisation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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