| Summary: | 碩士 === 國立成功大學 === 會計學系碩博士班 === 97 === Prior literature has actively investigated the relationships between financing and investment strategies, diversification and financing strategies, or diversification and investment strategies in isolation. The argument based on agency problem between shareholders and debt holders suggests a negative relationship between leverage and investment; the debt capacity theory suggests that firms diversify to increase their debt capacity; and the underinvestment theory proposes that diversified firms may reduce the underinvestment problem. However, as diversification, financing, and investment decisions considered simultaneously, we argue that increasing leverage due to diversification may not mitigate the underinvestment problem.
This paper consists of Taiwan listed companies, covering fiscal years 1995-2007. Our results suggest that although firms may diversify to increase their debt capacity, diversification may not increase their capital expenditures simultaneously. We also find evidence to support the debt capacity theory that if firms engage in higher degree of diversification and then undertake investment projects, their leverage will increase. Because diversified firms have the ability to issue more debt externally to pursue their investment due to their greater debt capacity. However, the increase of debt capacity due to diversification may not reduce the underinvestment problem. The finding is not consistent with the underinvestment theory, but may result from Myers’ (1977) agency problem which leads to an underinvestment problem. Overall, our empirical results suggest that appropriate diversification strategy will help firms undertake their financing and investment decisions more successfully. The findings in this study may also have shed light on the paradoxes of prior literatures on diversification.
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