Does diversification strategy matter in explaining capital structure? Some evidence from Spain

Abstract

The aim of this article is to study the effect of diversification strategy on firm capital structure using a panel data analysis for a sample of 480 Spanish manufacturing firms during the period 1991–1994. Co-insurance effect and transaction cost arguments help to explain a positive relation between firm debt ratio and firm diversification, while agency theory predicts a negative relation. This study did not find a significant relationship between firm leverage and the degree of firm diversification, using different debt ratios, and the revenue-based Herfindahl index and the entropy measure as proxies of firm diversification. This evidence contrasts with previous studies for American and Australian markets that suggest a positive relation, according to co-insurance effect and transaction cost explanations.