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Is There an Optimal Industry Financial Structure?

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  • Peter MacKay
  • Gordon M. Phillips

Abstract

We examine how intra-industry variation in financial structure relates to industry factors and whether real and financial decisions are jointly determined within competitive industries. We find that industry and group factors beyond standard industry fixed effects are also important to firm financial structure. Firm financial leverage, capital intensity, and cash-flow risk are interdependent decisions that depend on the firm's proximity to the median industry capital-labor ratio, the actions of firms within its industry quintile, and its status as entrant, incumbent, or exiting firm. Our results support competitive industry equilibrium models of financial structure in which debt, technology, and risk are simultaneous decisions.

Suggested Citation

  • Peter MacKay & Gordon M. Phillips, 2002. "Is There an Optimal Industry Financial Structure?," NBER Working Papers 9032, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9032
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    Cited by:

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    3. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    4. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
    5. Campello, Murillo, 2003. "Capital structure and product markets interactions: evidence from business cycles," Journal of Financial Economics, Elsevier, vol. 68(3), pages 353-378, June.
    6. Andrew Benito, 2003. "The capital structure decisions of firms: is there a pecking order?," Working Papers 0310, Banco de España.
    7. Sporleder, Thomas L. & Moss, Leeann E., 2001. "Capital Structure Decisions Of U.S.-Based Food Processing Firms: A Transaction Cost Economics Perspective," 2001 Regional Committee NC-221, October 1-2, 2001, McLean, Virginia 132394, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    8. Cook, Douglas O. & Fu, Xudong & Tang, Tian, 2016. "Are target leverage ratios stable? Investigating the impact of corporate asset restructuring," Journal of Empirical Finance, Elsevier, vol. 35(C), pages 150-168.
    9. Marianne Bertrand & Antoinette Schoar, 2003. "Managing with Style: The Effect of Managers on Firm Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1169-1208.
    10. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform," Finance and Economics Discussion Series 2004-53, Board of Governors of the Federal Reserve System (U.S.).
    11. Djordje Kalicanin & Miroslav Todorovic, 2014. "Interactions Between Business And Financial Strategies In Serbian Companies," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 59(203), pages 55-74, October –.
    12. DeYoung, Robert & Yom, Chiwon, 2008. "On the independence of assets and liabilities: Evidence from U.S. commercial banks, 1990-2005," Journal of Financial Stability, Elsevier, vol. 4(3), pages 275-303, September.
    13. Ignacio Munyo, 2004. "The Determinants of Capital Structure: Evidence from an Economy without Stock Market," Econometric Society 2004 Latin American Meetings 267, Econometric Society.
    14. Jen Baggs & James A Brander, 2006. "Trade liberalization, profitability, and financial leverage," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 37(2), pages 196-211, March.
    15. Baggs, Jennifer & Brander, James A., 2005. "Liberalisation des echanges, rentabilite et levier financier," Direction des études analytiques : documents de recherche 2005256f, Statistics Canada, Direction des études analytiques.
    16. Aggarwal, Raj & Zhao, Xinlei, 2007. "The leverage-value relationship puzzle: An industry effects resolution," Journal of Economics and Business, Elsevier, vol. 59(4), pages 286-297.
    17. Li, Guangzhong & Li, Jie, 2018. "Managerial diversion, product market competition, and firm performance," China Economic Review, Elsevier, vol. 50(C), pages 240-264.
    18. Campello, Murillo, 2006. "Debt financing: Does it boost or hurt firm performance in product markets?," Journal of Financial Economics, Elsevier, vol. 82(1), pages 135-172, October.
    19. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2002. "Market discipline in banking reconsidered: the roles of deposit insurance reform, funding manager decisions and bond market liquidity," Finance and Economics Discussion Series 2002-46, Board of Governors of the Federal Reserve System (U.S.).
    20. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "A reconsideration of the risk sensitivity of U.S. banking organization subordinated debt spreads: a sample selection approach," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 73-92.

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