Capital structure and market power

Abstract

Employing a sample set of 289 Thai listed firms during 2005-2014, the research found that leverage leads to increasing market power as measured by Tobin’s Q and sales growth. The explanation is given by the limited liability theory; that is, a firm employs debt as a commitment tool to compete aggressively in product markets. The main finding remained robust through different leveraged firms/groups, different market concentration groups, different time periods, and in different industrial sectors. Additionally, leverage had stronger effects on market power: if the period was during economic expansion, if the firm was low leveraged, if the firm was in a low-leveraged sector, and if the firm was in an unconcentrated industrial sector. Furthermore, when using total debt instead of long-term debt as the independent variable, the explanatory powers captured by the adjusted 𝑅�

s substantially increased. This suggests that the portion of short-term debt is an important source of finance and plays an important role in managing financial strategies, supporting the findings of previous research, that compared to developed countries, developing countries rely more on short-term finance.