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

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  • Samuel Fosu

Abstract

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.

Suggested Citation

  • Samuel Fosu, 2013. "Capital Structure, Product Market Competition and Firm Performance: Evidence from South Africa," Discussion Papers in Economics 13/11, Division of Economics, School of Business, University of Leicester.
  • Handle: RePEc:lec:leecon:13/11
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    7. Lips, Johannes, 2018. "Debt and the Oil Industry - Analysis on the Firm and Production Level," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181504, Verein für Socialpolitik / German Economic Association.
    8. Arief Yulianto & Rini Setyo Witiastuti & Widiyanto, 2021. "Debt versus Equity—Open Innovation to Reduce Asymmetric Information," Journal of Open Innovation: Technology, Market, and Complexity, MDPI, Open Access Journal, vol. 7(3), pages 1-13, August.
    9. Riaqa Mubeen & Dongping Han & Jaffar Abbas & Iftikhar Hussain, 2020. "The Effects of Market Competition, Capital Structure, and CEO Duality on Firm Performance: A Mediation Analysis by Incorporating the GMM Model Technique," Sustainability, MDPI, Open Access Journal, vol. 12(8), pages 1-18, April.
    10. 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.
    11. Micah Odhiambo Nyamita & Nirmala Dorasamy, 2014. "Factors Influencing Debt Financing within State-owned Corporations in Kenya," Journal of Economics and Behavioral Studies, AMH International, vol. 6(11), pages 884-905.
    12. Jay Desai & Rajesh Desai, 2019. "Capital Structure As Determinant Of Financial Performance: Review Of Literature," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 8(4), pages 133-148.
    13. Evans Akomeah & Paula Bentil & Alhassan Musah, 2018. "The Impact of Capital Structure Decisions on Firm Performance: The Case of Listed Non-Financial Institutions in Ghana," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(4), pages 1-15, October.
    14. Lukman Adebayo Oke & Daud Omotosho Saheed & Yusuf Olamilekan Quadri, 2019. "An Empirical Analysis Of Corporate Capital Structure And Financial Performance Of Listed Conglomerates In Nigeria," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 8(3), pages 95-114.
    15. Vu, Loan T. & Vu, Anh T. H. & Nguyen, Thao T. P., 2021. "Impacts of Capital Structure and Dividend Policy on the Financial Performance of Listed Companies on Vietnamese Stocks Market," OSF Preprints u8pd9, Center for Open Science.
    16. Zribi, Wissal & Boufateh, Talel, 2020. "Asymmetric CEO confidence and CSR: A nonlinear panel ARDL-PMG approach," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    17. Ramli, Nur Ainna & Latan, Hengky & Solovida, Grace T., 2019. "Determinants of capital structure and firm financial performance—A PLS-SEM approach: Evidence from Malaysia and Indonesia," The Quarterly Review of Economics and Finance, Elsevier, vol. 71(C), pages 148-160.
    18. Huynh, Toan Luu Duc & Wu, Junjie & Duong, An Trong, 2020. "Information Asymmetry and firm value: Is Vietnam different?," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    19. Julius B. Adesina & Barine M. Nwidobie & Oluwatosin O. Adesina, 2015. "Capital Structure and Financial Performance in Nigeria," International Journal of Business and Social Research, LAR Center Press, vol. 5(2), pages 21-31, February.
    20. Mukhoti, Sujay & Guhathakurta, Kousik, 2015. "Product market performance and capital structure: A Hierarchical Bayesian semi-parametric panel regression model," MPRA Paper 62517, University Library of Munich, Germany.
    21. Matthew Adeolu Abata & Stephen Oseko Migiro & Joseph Olorunfemi Akande & Raredzo Layton, 2017. "Does Capital Structure Impact on the Performance of South African Listed Firms?," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 13(6), pages 334-350, DECEMBER.

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    More about this item

    Keywords

    Capital structure; Product market competition; Firm performance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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