Product diversification, capital structure and dynamic adjustments: Empirical evidence from Tanzania

Abstract

This study assessed the role of product diversification on capital structure variability and its dynamic nature. It used static, dynamic and hierarchical regression techniques. Both fixed effects and general methods of moments’ estimators were employed. Related product diversification was significantly negatively related to capital structure while unrelated and total product diversification was significantly positively related to it. Hierarchical regression indicated that product diversification had a significant share of contribution to capital structure variability. These findings highlight the significance of co-insurance and monitoring effects implicit to product diversification. Related diversification is risky and thus associated with internal financing. Unrelated product diversification is less risky. It highlights the fact that the type of product diversification has different effects on firm financing. The speed of adjustment of capital structures was low, indicating that firms are slowly adjusting their capital structures towards optimum levels.