Relationship between Assorted Product Diversification and capital structure: Empirical verdict from manufacturing sector in Pakistan
This study examines the individual effects of two types of product diversification (related and unrelated) on capital structure with the data of 51 manufacturing firms in Pakistan. Among total sample firms, 37 are identified as related and 14 as unrelated product diversified firms. The comparative analysis of both types of product diversified firms is performed by parametric and non-parametric tests and ordinary least square regression analysis confirms the results that capital structures of related and unrelated product diversified firms are significantly different from each other in Pakistan. Moreover, related diversified firms have significant positive relationship with debt ratio which is higher than unrelated diversified firms. The positive relationship indicates that related diversification allows firms to reduce their risk (co-insurance effect) which enables them to carry more debt. However, unrelated diversified firms have negative significant relationship with leverage, depicting comparatively lower debt ratio due to better performance, yet they maintain their target debt ratio in order to get tax advantage.
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