The Effects of Diversification Strategies on Capital Structure

The role of diversification strategies in financial choices has received little attention in previous empirical financial studies. The aim of this paper is to study the effect of corporate diversification strategies on firm capital structure using a panel data analysis for a sample of 232 European firms during the period 2004-2007. Theoretical and empirical studies suggest that corporate leverage is positively related to diversification across product lines but negatively related to geographic diversification. Some studies show that these diversification strategies are complementary in generating debt usage. This paper estimates two alternative models employed by previous empirical work in the study of capital structure determinants: static trade-off model and a dynamic target adjustment model. After controlling for firm size, profitability, growth, assets tangibility and operating risk, the study finds that product and geographical diversification do not have a significant influence on leverage.