The Relationship Between Diversification Strategies And Capital Structure Of Non-financial Firms Listed At The Nse

Abstract

Diversification is one significant method that firms use to maintain their competitiveness and enhance their profitability. Firms seek diversification strategy in order to achieve value creation through economies of scope, financial economies, or market power. 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. 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, 47 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. Co-efficient of determination and F- value was used to interpret the data with the results presented through frequency tables. The study found that related product diversification strategies and unrelated product diversification strategies have a positive and significant influence on capital structure decisions of non-financial firms listed at NSE. However, geographical diversification strategies had no significant influence on capital structure decisions of non-financial firms listed at NSE. Related diversification helps a company to expand to new products and markets but within the existing strategic capability. The study results show that debt is the most preferred form of financing in related product diversification strategies. Unrelated diversifiers have a better position to create financial synergies by transferring capital across different businesses and through operating various businesses with different risk profiles. The findings of this study show that debt is the most preferred form of financing in unrelated product diversification strategies. Geographical diversification boosts the worth of shareholders by taking advantage of specific assets and by accelerating functioning flexibility. 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 is because, beside equity holders providing funding, they could be helpful by bringing in their business experiences, skills, and contacts to grow the business. 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.