Market structure and financial leverage: does market power affect debt and equity decisions?

An attempt is made to determine whether the choice of financial leverage by a firm is influenced by the market structure of its industry. Financial data on the firms from industries for which a meaningful measure of the Herfindahl-Hirschman Index (HHI) is available were collected from the COMPUSTAT...

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Bibliographic Details
Published in:Akron business and economic review 1990-07, Vol.21 (2), p.69
Main Authors: Kare, Dilip D, Price, Donald I
Format: Article
Language:English
Subjects:
Capital structure
Corporations
Debt
Effects
Equity
Finance
Financial leverage
Hypotheses
Leverage (Finance)
Manyindustries
Ratio analysis
Regression analysis
Studies
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Summary:An attempt is made to determine whether the choice of financial leverage by a firm is influenced by the market structure of its industry. Financial data on the firms from industries for which a meaningful measure of the Herfindahl-Hirschman Index (HHI) is available were collected from the COMPUSTAT annual industrial file. The HHIs were calculated for the year 1977 using COMPUSTAT and Census data. Empirical analysis of data collected on 336 firms from 37 manufacturing industries yielded results strongly supporting the theory that the market structure of an industry and the financial leverage of firms in that industry are related. The ordinary least squares estimate of the coefficient of the variable representing the relative size feature of market structure is positive and statistically significant at the 99% confidence level. The most significant finding of the study is that more heavily concentrated industries tend to employ higher levels of equity in their capital structure.
ISSN:0044-7048