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Market Competition, Arbitrage Risk, And Capital Structure: Evidence From Taiwan

Author

Listed:
  • YU-EN LIN

    (Business School, Jilin University, Jilin, P. R. China)

  • HSIANG-HSUAN CHIH

    (Department of Finance, National Dong Hwa University, Hualien, Taiwan, R.O.C.)

  • CHIA-HSIN CHENG

    (Department of Accounting, City College Wenzhou University, Zhejiang, P. R. China)

  • YAN-QING KU

    (Business School, Wuyi University, Fujian, P. R. China)

Abstract

The purpose of this paper is to understand how the product market competition and the arbitrage risk affects managers’ decisions on capital structure. To find managers’ risk preference, we introduce the interaction between market competition and the arbitrage risk of the firm. Sampling from Taiwanese listed companies from 1986 to 2011, we identify both the market competition and the arbitrage risk affects managers’ debt decisions. In addition, we find that most managers in monopolistic firms increase debt to decrease the agency costs. However, some hold risk-averse motivation to enjoy their “quiet life”. These “quiet life” managers exist in those companies that are in non-competitive markets and that exists large idiosyncratic risk.

Suggested Citation

  • Yu-En Lin & Hsiang-Hsuan Chih & Chia-Hsin Cheng & Yan-Qing Ku, 2016. "Market Competition, Arbitrage Risk, And Capital Structure: Evidence From Taiwan," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-11, March.
    • Handle: RePEc:wsi:afexxx:v:11:y:2016:i:01:n:s2010495216500020
    DOI: 10.1142/S2010495216500020
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