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Diversification and Capital Structure: Some International Evidence

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  • Pek Yee Low
  • Kung H. Chen

Abstract

This study examines the effects of international and product diversification on capital structure with 232 firms from 30 countries. Results for the full sample show that international diversification is negatively related to financial leverage, but further analyses indicate that this is mainly attributable to US firms. For non-US firms, we fail to find a significant relationship. Results also show that product diversification is positively related to financial leverage, indicating that such diversification allows firms to reduce their risks, thereby enabling firms to carry higher debt levels.

Suggested Citation

  • Pek Yee Low & Kung H. Chen, 2004. "Diversification and Capital Structure: Some International Evidence," Review of Quantitative Finance and Accounting, Springer, vol. 23(1), pages 55-71, July.
    • Handle: RePEc:kap:rqfnac:v:23:y:2004:i:1:p:55-71
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    Cited by:

    1. Sulaiman Al-Jassar & Imad A. Moosa, 2020. "Country Effects, Industry Effects and the Effectiveness of International Diversification Within the GCC Region," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-18, January.
    2. David Smith & Jianguo Chen & Hamish Anderson, 2012. "The relationship between capital structure and product markets: evidence from New Zealand," Review of Quantitative Finance and Accounting, Springer, vol. 38(1), pages 1-24, January.
    3. Maté-Sánchez-Val, Mariluz & López-Hernandez, Fernando & Mur-Lacambra, Jesús, 2017. "How do neighboring peer companies influence SMEs’ financial behavior?," Economic Modelling, Elsevier, vol. 63(C), pages 104-114.
    4. Pacheco, Luís, 2016. "Capital structure and internationalization: The case of Portuguese industrial SMEs," Research in International Business and Finance, Elsevier, vol. 38(C), pages 531-545.
    5. Ramirez, Andres & Kwok, Chuck C.Y., 2010. "Settling the debate on multinational capital structure using the CEPR measure," Journal of Multinational Financial Management, Elsevier, vol. 20(4-5), pages 251-271, December.
    6. Chiung-Jung Chen & Chwo-Ming Joseph Yu, 2011. "FDI, Export, and Capital Structure," Management International Review, Springer, vol. 51(3), pages 295-320, June.
    7. Wang, Zhimin & Ettinger, Marilyn & Xie, Yuying & Xu, Li, 2020. "The cost of capital: U.S.-based multinational corporations versus U.S. domestic corporations," Global Finance Journal, Elsevier, vol. 44(C).
    8. Chou, Ting-Kai & Cheng, Jia-Chi, 2012. "Credit ratings and excess value of diversification," Journal of Empirical Finance, Elsevier, vol. 19(2), pages 266-281.
    9. Lindner, Thomas & Klein, Florian & Schmidt, Stefan, 2018. "The effect of internationalization on firm capital structure: A meta-analysis and exploration of institutional contingencies," International Business Review, Elsevier, vol. 27(6), pages 1238-1249.
    10. Andreas Kaloudis & Dimitrios Tsolis, 2018. "Capital Structure in U.S., a Quantile Regression Approach with Macroeconomic Impacts," Papers 1801.06651, arXiv.org.
    11. Emel Yücel & Yıldırım Beyazıt Önal, 2016. "Industrial Diversification and Performance in an Emerging Market," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(4), pages 441-454, September.
    12. Florence André-Le Pogamp & Frédéric Perdreau, 2009. "Stratégies de diversification et structure du capital," Revue Finance Contrôle Stratégie, revues.org, vol. 12(4), pages 5-38, December.
    13. Andrew Vivian & Bin Xu, 2018. "Time-varying managerial overconfidence and pecking order preference," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 799-835, April.
    14. Liu-Ching Tsai & Chaur-Shiuh Young & Hui-Wen Hsu, 2011. "Entrenched controlling shareholders and the performance consequences of corporate diversification in Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 37(1), pages 105-126, July.
    15. Luis R. Gomez‐Mejia & Marianna Makri & Martin Larraza Kintana, 2010. "Diversification Decisions in Family‐Controlled Firms," Journal of Management Studies, Wiley Blackwell, vol. 47(2), pages 223-252, March.
    16. Maurizio La Rocca & Tiziana La Rocca & Dionigi Gerace & Ciorstan Smark, 2009. "Effect of diversification on capital structure," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(4), pages 799-826, December.

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