Capital Structure and Market Power Interaction: Evidence from Malaysia

22 Pages Posted: 19 Nov 2002

See all articles by I. M. Pandey

I. M. Pandey

University of Delhi; School of Management

Abstract

This paper provides new insights on the way in which the capital structure and market power and capital structure and profitability are related. We predict and show that capital structure and market power, as measured by Tobin's Q, have a cubic relationship. That is, at lower and higher ranges of Tobin's Q, firms employ higher debt, and reduce their debt at intermediate range. This is due to the complex interaction of the market conditions, agency problems and bankruptcy costs. We also show saucer-shaped relation between capital structure and profitability because of the interplay of agency costs, costs of external financing and debt tax shield. To our knowledge, we are the first to uncover these results.

Keywords: capital structure; market structure; market power; Tobin's Q; risk-shifting; moral hazard; agency problems; pecking order; trade-off theory; asset substitution

JEL Classification: G32, C23, D21

Suggested Citation

Pandey, Indra Mohan, Capital Structure and Market Power Interaction: Evidence from Malaysia. Available at SSRN: https://ssrn.com/abstract=322700 or http://dx.doi.org/10.2139/ssrn.322700

Indra Mohan Pandey (Contact Author)

University of Delhi ( email )

University Road
Kirti Nagar
Delhi, DE New Delhi 110 007
India

School of Management ( email )

Pathumthani 12120
Thailand

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