The Effect of Competition in Product Market on the Degree of Relationship between Capital Structure and Business Enterprise Performance

Journal of Accounting Advances (J.A.A)
Vol. 6, No. 2, 2014, Ser. 67/3
 
 
Extended Abstract
 
The Effect of Competition in Product Market on the Degree of Relationship between Capital Structure and Business Enterprise Performance
 
Dr. Rahim Ghasemiyeh                                Ali Ghayori Moghadam
Persian Gulf University, Bushehr
 
Hamid Reza Hajeb
Persian Gulf University, Bushehr
 
Introduction
Much of the literature regarding capital structure indicates that not only conflict between manager and owner but also external group impact on funding decisions. It emphasizes that a firm and its competitors are under influence of the method of funding of a firm. Existing literature provides a number of basic approaches for linking market limitations and funding decisions. A large part of empirical literature such as Bolton & Scharfstein (1990), Chevalier & Scharfstein (1996) and Dasgupta & Titman (1998) argue that the impact of financial leverage on performance is related to the degree of competition in capital market. Subsequently, this research is organized to dealing with the issue of whether or not the competition in product market can impact the relationship between financial leverage and performance of the companies listed on Tehran Stock Exchange. In other words, the current research intends to answer if the extent of competition in product market can make any difference on the extent of correlation between financial leverage and performance.
 
 
Questions and hypotheses
The main question is “Does the degree of competition in product market influence the intensity of financial-leverage impact on performance? Thus the following hypotheses have been developed:

Financial leverage has a U-form impact on performance
The completion level has a positive impact on performance
With respect to the change in competition extent, the impact of financial leverage on performance is made better or worse.

 
Methodology
Using Herfindahl-Hirschman’s index, the level of competition has been calculated. Then, considering the level of competition the impact of capital structure on performance, utilizing mix data regression has been examined. Using data of 133 companies during a 5 years period (1385-1389) this research has benefited from time series and also deals with cross sectional data. In order to incorporate time series and cross sectional data, a combination of data should be used.
 
Conclusion and Results
The results indicate that the financial leverage has a u-shape impact on performance. The level of competition has a meaningful impact on performance. Due to the degree of financial leverage, this impact has a direct correlation with the competition. Also this research shed light on this point that “the impact of financial leverage on performance” is also under the influence of level of competition. This research verifies a direct correlation between level of financial leverage and the level of competition. Also the leverage firms in competitive market show a better performance than a focused (centralized) market.