A Decision Engineering Problem for Operating Diversification in Debt Financing Constraints

Abstract

This study examined the relationship between the capital structure of diversified companies and their diversification degree in different levels of financing constraint. After controlling the firm size, growth power as well as other variables which also have great impact on the financing structure decision of the company, we find out from the empirical results that the effects of diversification degree on capital structure are disparate for firms facing different financing constraints. For companies that are in extremely terrible solvency condition, the leverage ratio is negatively related to the diversification degree. While for companies that face less debt financing constraint, the leverage is positively related to diversification degree.