IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Capital Structure, Product Market Competition and Firm Performance: Evidence from South Africa

  • Samuel Fosu

    ()

Registered author(s):

    This paper investigates the relationship between capital structure and firm performance, paying particular attention to the degree of industry competition. The paper applies a novel measure of competition, the Boone indicator, to the leverage performance relationship. Using panel data consisting of 257 South African firms over the period 1998 to 2009, this paper examines the effect of capital structure on firm performance and investigates the extent to which the relationship depends on the level of product market competition. The results suggest that financial leverage has a positive and significant effect on firm performance. It is also found that product market competition enhances the performance effect of leverage. The results are robust to alternative measures of competition and leverage.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.le.ac.uk/economics/research/repec/lec/leecon/dp13-11.pdf
    Download Restriction: no

    Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 13/11.

    as
    in new window

    Length:
    Date of creation: May 2013
    Date of revision:
    Handle: RePEc:lec:leecon:13/11
    Contact details of provider: Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK
    Phone: +44 (0)116 252 2887
    Fax: +44 (0)116 252 2908
    Web page: http://www2.le.ac.uk/departments/economics
    Email:


    More information through EDIRC

    Order Information: Web: http://www2.le.ac.uk/departments/economics/research/discussion-papers Email:


    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Campello, Murillo, 2003. "Capital structure and product markets interactions: evidence from business cycles," Journal of Financial Economics, Elsevier, vol. 68(3), pages 353-378, June.
    2. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
    3. Lev, Baruch & Sunder, Shyam, 1979. "Methodological issues in the use of financial ratios," Journal of Accounting and Economics, Elsevier, vol. 1(3), pages 187-210, December.
    4. Aghion, Philippe & Braun, Matias & Fedderke, Johannes, 2008. "Competition and Productivity Growth in South Africa," Scholarly Articles 3350068, Harvard University Department of Economics.
    5. Saibal Ghosh, 2008. "Leverage, foreign borrowing and corporate performance: firm-level evidence for India," Applied Economics Letters, Taylor & Francis Journals, vol. 15(8), pages 607-616.
    6. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
    7. M. Ruth & K. Donaghy & P. Kirshen, 2006. "Introduction," Chapters, in: Regional Climate Change and Variability, chapter 1 Edward Elgar.
    8. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," North American Stata Users' Group Meetings 2003 05, Stata Users Group.
    9. Nickell, S.J., 1993. "Competition and Crporate Performance," Economics Series Working Papers 99155, University of Oxford, Department of Economics.
    10. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-35, June.
    11. Laurent Weill, 2008. "Leverage and Corporate Performance: Does Institutional Environment Matter?," Small Business Economics, Springer, vol. 30(3), pages 251-265, March.
    12. Boone, J., 2004. "A New Way to Measure Competition," Discussion Paper 2004-31, Tilburg University, Center for Economic Research.
    13. Margaritis, Dimitris & Psillaki, Maria, 2010. "Capital structure, equity ownership and firm performance," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 621-632, March.
    14. Jan Boone & Henry van der Wiel & J. van Ours, 2007. "How (not) to measure competition," CPB Discussion Paper 91, CPB Netherlands Bureau for Economic Policy Analysis.
    15. Johannes Fedderke & Chandana Kularatne & Martine Mariotti, 2005. "Mark-up Pricing in South African Industry," Working Papers 01, Economic Research Southern Africa.
    16. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    17. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, 08.
    18. Michiel van Leuvensteijn & Jacob Bikker & Adrian van Rixtel & Christoffer Kok S�rensen, 2011. "A new approach to measuring competition in the loan markets of the euro area," Applied Economics, Taylor & Francis Journals, vol. 43(23), pages 3155-3167.
    19. Aghion, Ph. & Dewatripont, M. & Rey, P., 1997. "Corporate governance, competition policy and industrial policy," European Economic Review, Elsevier, vol. 41(3-5), pages 797-805, April.
    20. Randall Morck & David Stangeland & Bernard Yeung, 2000. "Inherited Wealth, Corporate Control, and Economic Growth The Canadian Disease?," NBER Chapters, in: Concentrated Corporate Ownership, pages 319-372 National Bureau of Economic Research, Inc.
    21. Kovenock, Dan & Phillips, Gordon M, 1997. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 767-803.
    22. Graham Barr & Jos Gerson & Brian Kantor, 1995. "Shareholders As Agents And Principals: The Case For South Africa'S Corporate Governance System," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(1), pages 1-32.
    23. Michael R. King & Eric Santor, 2007. "Family Values: Ownership Structure, Performance and Capital Structure of Canadian Firms," Working Papers 07-40, Bank of Canada.
    24. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    25. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, November.
    26. Kedia, Simi, 2006. "Estimating product market competition: Methodology and application," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 875-894, March.
    27. Charles P. Himmelberg & R. Glenn Hubbard & Darius Palia, 2000. "Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance," NBER Working Papers 7209, National Bureau of Economic Research, Inc.
    28. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    29. Chevalier, Judith A & Scharfstein, David S, 1996. "Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence," American Economic Review, American Economic Association, vol. 86(4), pages 703-25, September.
    30. Opler, Tim C & Titman, Sheridan, 1994. " Financial Distress and Corporate Performance," Journal of Finance, American Finance Association, vol. 49(3), pages 1015-40, July.
    31. Johannes Fedderke & Witness Simbanegavi, 2008. "South African Manufacturing Industry Structure and its Implications for Competition Policy," Working Papers 111, Economic Research Southern Africa.
    32. Booth, L. & Asli Demirgu-Kunt, V.A. & Maksimovic, V., 1999. "Capital Structure in Developing Countries," Rotman School of Management - Finance 00-001, Rotman School of Management, University of Toronto.
    33. Demsetz, Harold & Villalonga, Belen, 2001. "Ownership structure and corporate performance," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 209-233, September.
    34. Brian Kantor, 1998. "Ownership And Control In South Africa Under Black Rule," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(4), pages 69-78.
    35. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
    36. Wanzenried, Gabrielle, 2003. "Capital structure decisions and output market competition under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 171-200, February.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:lec:leecon:13/11. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mrs. Alexandra Mazzuoccolo)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.