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

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  • Eduardo Menendez-Alonso

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.

Suggested Citation

  • Eduardo Menendez-Alonso, 2003. "Does diversification strategy matter in explaining capital structure? Some evidence from Spain," Applied Financial Economics, Taylor & Francis Journals, vol. 13(6), pages 427-430.
    • Handle: RePEc:taf:apfiec:v:13:y:2003:i:6:p:427-430
    DOI: 10.1080/09603100210150930
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    References listed on IDEAS

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    Cited by:

    1. Mishra, Dev & Tannous, George, 2010. "Securities laws in the host countries and the capital structure of US multinationals," International Review of Economics & Finance, Elsevier, vol. 19(3), pages 483-500, June.

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