Capital Structure



Capital Structure Influences Product Market Competition and Corporate Default

Introduction

For long term survival of the company, Capital structure and its planning is very important since it formulate strong balance sheet which ultimately increases the worth of the company not only for investors but also for other channels in the market. It also enhances the company power to tackle with the losses or any change in the financial market. Beside this, capital structure of the company shapes the product market competition and corporate default. At this point, the concept of investment policy, payout policy and corporate governance are linked with the capital structure decision.

Background of the Study

The theory laid by Modigliani and Miller (1958, 1963) regarding the capital structure theory which has been develop from his popular Irrelevance Propositions, i.e. by means of the assumption - perfect capital market. But there is no explanation of the behavior of corporate finance. Therefore, the challenge by the financial economist on his model that return stream of the firm has been unaffected by the capital structure in a tax free world. In view of the influential work by Modigliani and Miller, various competing capital structure theories has been developed with the view that real return streams are shaped through the financing decision of the firm. Therefore, the current financial text by different researchers states that the firm's capital structure determinants are yet to be debated and need additional investigation. According to the Myers (1984), this is deficiency of consensus i.e. capital structure puzzle.

The current capital structure has few problems and one of them is that no consideration is given to the association between the financial policy of the firm and output and input of the market. This should be noted that there is strong relationship between the financial policy of the firm and the product markets i.e. they both interact with each other and through this, company generate cash-flows. Furthermore, it is debatable that company eventual survival relies on the competition in the market i.e. how they compete in the product market with their competitors. The survey reported by Donaldson (1961) state that significant firm's debt policy determinants are proportional market position in the industry. Beside this, another survey by Scott and Johnson (1982) states that company's leverage decisions as been much influence by the industry-wide leverage ratios.

Problem Statement

The current theoretical text presented on capital structure has not only focused on the problems between firm agents that are managers and investors but also the focus has been on the financing decisions for firm outside agents' i.e. competitors and consumers. In this research, the focus would be on examining on how firm's capital structure influences product markets competition and corporate default. For this purpose other related work on various aspects of the interaction between capital structure, investment policy, payout policy and corporate governance will be stress out.

Objective of the Research

The objectives of this research are as followed:

To analysis the firm's capital structure and product markets interactions

To analysis the firm's capital ...