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RFS Advance Access originally published online on August 31, 2005
Review of Financial Studies 2005 18(4):1433-1466; doi:10.1093/rfs/hhi032
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Right arrow G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
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© The Author 2005. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oupjournals.org

How Does Industry Affect Firm Financial Structure?

Peter MacKay
Hong Kong University of Science and Technology

Gordon M. Phillips
University of Maryland and NBER

MacKay can be reached at pmackay{at}ust.hk, homepage http://www.bm.ust.hk/fina/staff/pmackay.html.

Phillips can be reached at gphillips{at}rhsmith.umd.edu, homepage www.rhsmith.umd.edu/Finance/gphillips/. The authors alone are responsible for the work and any errors or omissions.

We examine the importance of industry to firm-level financial and real decisions. We find that in addition to standard industry fixed effects, financial structure also depends on a firm’s position within its industry. In competitive industries, a firm’s financial leverage depends on its natural hedge (its proximity to the median industry capital–labor ratio), the actions of other firms in the industry, and its status as entrant, incumbent, or exiting firm. Financial leverage is higher and less dispersed in concentrated industries, where strategic debt interactions are also stronger, but a firm’s natural hedge is not significant. Our results show that financial structure, technology, and risk are jointly determined within industries. These findings are consistent with recent industry equilibrium models of financial structure.


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[Abstract] [Full Text] [PDF]


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