The Relationship between Diversification Strategies and Capital Structure of Non-Financial Firms Listed At the NSE

Abstract

Purpose-This  study  was  carried  out  with  an  aim  to  analyze  the  effect  of diversification strategies on capital structure of non-financial firms listed at NSE. The study focused specifically on analyzing the effect of product (related and unrelated) and geographical diversification on capital structure.

Methodology-An exploratory study design was used to collect data, with the population of the study being 64 firms listed in NSE. Out of the 64 firms, 41 non- financial firms were selected as the sample of the study. Data was collected from secondary sources, NSE and capital market authority. Data collected was analyzed through STATA by the use of panel data regression analysis.

Findings- Related product diversification had a coefficient of 21.5(p-value=0.007) indicating that it has a significant relationship with capital structure. The study results show  that  debt  is  the  most  preferred  form  of  financing  in  related  product diversification strategies. Unrelated product diversification had a coefficient of 22.7(p value =0.006) indicating that it has a significant relationship with capital structure.The findings of this study show that debt is the most preferred form of financing in unrelated product diversification strategies. Geographical diversification had a coefficient of 0.178 (p-value=0.799) indicating that it doesn’t have a significant relationship with capital structure.Geographical diversification boosts the worth of shareholders by taking advantage of specific assets and by accelerating functioning flexibility.

Implications-This study recommends that firms can increase their market power through increasing their new products and markets, which can be financed though debt financing. In addition, the management of firms should strive towards having optimum capital structure by increasing their equity level and reducing dependence on debts so as to avoid being cash strapped and debt ridden. This study also recommends that firms focus on geographic diversification as it has advantages such as lower cost of production, but it should not be financed through debt or equity.

Value- Relevant government authorities, who formulate policies to guide companies and protect consumers, would benefit from important information the study would provide for this purpose.