The purpose of this paper is to test whether product market strategies have any effect on managerial shareholdings, leverage usage and firm diversification.
The paper focuses on a sample of US manufacturing firms and defines variables to proxy for product quality, ownership, financing and diversification. Regressions were run to test hypotheses.
A positive relation was found between product quality and managerial ownership and a negative relation between product quality and use of leverage. Also, controlling for firm size, it was found that firm focus is concave in managerial shareholdings.
Although the paper provides a path towards understanding intra‐industry variations in corporate capital structures, it is recognized that additional research on such variations is warranted.
The paper provides an explanation for the evidence that all‐equity firms are distinguished by large management shareholdings. In fact, one such firm, Microsoft Corporation, provides one of the best examples of the paper's argument on why concentrated managerial shareholdings and financial slack facilitate an aggressive approach to protect a firm's margins.
This paper contributes to the literature, which relates product market competition to corporate capital structure and uses a different regression model than used in prior research. Specifically, the quasi‐likelihood approach for fractional variables was used. Ownership variables are fractional variables that are not censored or logistic normally distributed, as presumed in some prior literature.
