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Zero leverage and product market competition

Author

Listed:
  • Vu Tuan Chu

    (National Economics University)

  • Trang Hanh Lam Pham

    (National Economics University)

Abstract

The paper examines how product market competition can explain why some firms choose to maintain absolutely zero debt in their capital structure despite the clear advantages of debt financing. A wide range of financial theories such as the financial flexibility or underinvestment hypothesis has been put forward to explain the zero-leverage phenomenon. Product market competition plays a crucial role in formulating corporate decisions in private firms but its relationship with the zero-debt holding behavior of private firms is still an underexplored issue in finance research. Results from this study show that product market competition has a significantly positive influence on the zero-leverage behavior of firms but only to certain point. Importantly, the connection between product market competition and zero-leverage policy has been consistently significant across industries and different periods of time. The method used in this paper is the logistic regression, controlling for all the defining characteristics of the firms that reportedly cause them to eschew from debt financing.

Suggested Citation

  • Vu Tuan Chu & Trang Hanh Lam Pham, 2021. "Zero leverage and product market competition," SN Business & Economics, Springer, vol. 1(4), pages 1-18, April.
    • Handle: RePEc:spr:snbeco:v:1:y:2021:i:4:d:10.1007_s43546-021-00062-9
    DOI: 10.1007/s43546-021-00062-9
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    More about this item

    Keywords

    Zero leverage; Product market competition; Capital structure; Debt financing;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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