Effect of diversification on capital structure

Abstract

Previous empirical financial studies have paid little attention to the role of diversification strategy on financial choices. This study analyses the financing strategies of multibusiness firms, suggesting the relevance of sorting the diversification phenomena into its related and unrelated components. The implications of our findings are important because they explain earlier contradictory results on capital-structure determinants and offer an explanation of how the degree of product specialization/diversification and the direction of diversification (related or unrelated) translate into different corporate financial behaviours. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

Does Diversification Affect Capital Structure and Profitability in Pakistan?

“…They observe lower leverage and preference for equity financing in the related diversified firms that are based on business synergies as compared to their specialized counterparts, and high leverage in unrelated diversified firms based on financial synergies (La Rocca, et al, 2009). Additionally, the firms diversifying through acquisitions are more likely to use public sources of financing while the firms accentuating internal development of new businesses depend primarily on private sources of financing (Kochhar & Hitt, 1998).…”

“…However, negating these findings others find out that there is no association between leverage and diversification and many of the benefits associated with diversification are not in fact achieved (Comment & Jarrell, 1995). Considering the classification of diversification into related and unrelated, some observe that the firms having related diversification have lower debt ratio than specialized firms, whereas unrelated-diversified firms have higher debt level (La Rocca, La Rocca, Gerace, & Smark, 2009). Some others suggest resolutions to the conflicts along with identifying limitations of the earlier conflicting theoretical and empirical studies by further differentiating the diversified firms.…”

“…The literature (La Rocca, et al, 2009) suggests that there exists a likely interaction between diversification variables and other variables like non-debt tax shield, ownership concentration, tangibility, firm size, andgrowth opportunities to affect corporate profitability and capital structure. Following (La Rocca, et al, 2009) we consider profitability and capital structure as dependent variables, and diversification as well as non-debt tax shield, ownership concentration, tangibility, firm size, andgrowth opportunities as independent variables to identify and analyze their relationship.…”

“…Product diversification implies the range of products in which the company is operating (La Rocca, et al, 2009). In order to develop theoretical framework we will review a number of studies that have investigated the relationship of different types of diversification with capital structure, firm value and profitability.…”

“…Following (La Rocca, et al, 2009) we consider profitability and capital structure as dependent variables, and diversification as well as non-debt tax shield, ownership concentration, tangibility, firm size, andgrowth opportunities as independent variables to identify and analyze their relationship.…”