Capital Structure, Ownership Type, and Firm Performance in Product Markets
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| Title | Capital Structure, Ownership Type, and Firm Performance in Product Markets
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| Author | Pan Yueqi, Jia Shenghua and Wu Aiqi |
| Organization | School of Management, Zhejiang University |
| Email | panyueqi@gmail.com,jsh@zju.edu.cn,wuaiqi@zju.edu.cn |
| Key Words | Capital Structure; Product Markets Competition; Ownership Type; Soft Budget Constraint; Financing Constraints |
| Abstract | The dominant theory on capital structure and product market interactions cannot effectively explain the effect of capital structure on state-owned enterprises’ performance in product markets. Based on the strong soft budget constraint and weak financing constraints characteristics of state-owned enterprises, we propose a “soft budget constraint effect” argument: as a result of government assistance, state-owned enterprises are not sensitive to the scale of potential losses; the higher debt ratio, the lower sensitivity. Therefore, debt will aggravate the state-owned enterprises’ behavior in product markets. Moreover, a state-owned enterprise’s decision to use debt works as a commitment to more aggressive behavior in product markets, which will have an impact on the market equilibrium. Eventually, debt boosts state-owned enterprises’ performance in product markets, but this effect will decrease with the degree of marketization. We empirically examine this argument using data from the real estate industry during 2004 and 2008 and find strong evidence. |
| Serial Number | WP49 |
| Time | 2011-02-14 |
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