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Capital Structure and MarketPower

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  • Pandey I M

Abstract

This paper provides new insights on the way in which the capital structure and market power and capital structure and profitability are related. We predict and show that capital structure and market power, as measured by Tobins Q, have a cubic relationship. That is, at lower and higher ranges of Tobins Q, firms employ higher debt, and reduce their debt at intermediate range. This is due to the complex interaction of the market conditions, agency problems and bankruptcy costs. We also show saucer-shaped relation between capital structure and profitability because of the interplay of agency costs, costs of external financing and debt tax shield. To our knowledge, we are the first to uncover these results.

Suggested Citation

  • Pandey I M, 2002. "Capital Structure and MarketPower," IIMA Working Papers WP2002-03-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    • Handle: RePEc:iim:iimawp:wp00009
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    Cited by:

    1. Mateja Gabrijelčič & Uroš Herman & Andreja Lenarčič, 2016. "Firm Performance and (Foreign) Debt Financing before and during the Crisis: Evidence from Firm-Level Data," Working Papers 15, European Stability Mechanism.
    2. Hakimi, Abdelaziz, 2018. "Threshold Effect of the Number of Bank Relationships on the Tunisian Firm Performance," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 9(2), pages 317-330, April.
    3. Ramachandran Azhagaiah & Raju Deepa, 2012. "Determinants of Profitability of Food Industry in India: A Size-Wise Analysis," Management, University of Primorska, Faculty of Management Koper, vol. 7(2), pages 111-128.

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