The Interactive Relationship Between Product Market Competition And Debt Financing Choice

All the time, the capital structure decision-making and product market competition behavior is separated in the study. But gradually, financial economists and industrial economists realized that the capital structure and product market competition is endogenous. Firstly, the product market competition condition would have an effect upon the profit level of enterprise, then affects the financial standing of the enterprise, which will set a limit to the enterprise’s current debt financing quantity, and eventually influence the capital structure decision. Secondly, the debt constraints which include the debt level, the long-term debt proportion, the short-term debt proportion, make the company to get enough cash flow to repay the debt in a certain time. Then it influence the product market competition behavior of the company.In this paper we study the product market competition from structure and performance two levels. Firstly we divide samples into two groups using HHI index. Then we use the factor analysis to extract the principal component from three variables to replace the product market competition. We collect the panel data from2008to2010of Chinese listed companies, and establish multiple linear regression equations to test the interactive relationship between product market competition and capital structure, debt maturity structure. And we found:(1)In monopoly industries, capital structure and the short-term debt ratio are significantly negatively related to product market competition, and long-term debt ratio is significantly positively related to product market competition. It means that the lower the asset-liability ratio and the short-term debt ratio, and the higher the long-term debt ratio, the product market competition is more intense. Product market competition is significantly negatively related to capital structure and short-term debt ratio, and is significantly positively related to long-term debt ratio. It means that the more intense the product market competition is, the lower asset-liability ratio and short-term debt ratio, and the higher long-term debt ratio.(2)In competitive industries, capital structure is significantly positively related to product market competition, the long-term debt ratio is not significantly related to product market competition, the short-term debt ratio is significantly negatively related to product market competition. It means that the higher the asset-liability ratio, and the lower the short-term debt ratio, the more intense the product market competition. Product market competition is significantly positively related to the capital structure and the long-term debt ratio, and is significantly negatively related to short-term debt ratio. It means that the more intense the product market competition, the higher the asset-liability ratio and long-term debt ratio, and the lower the short-term debt ratio.