Interactive effect of product and international diversification on capital structure

This paper examines the link between product diversification, geographic diversification and capital structure for a panel of medium and large Italian firms. Results indicate that product and geographic diversification individually are positively related to capital structure, but the interactive variable between product and geographic diversification have a negative and significant coefficient. In contrast with previous empirical evidence, our findings support the hypothesis that complexity that comes from diversification reduce access to debt. When firms engage simultaneously in both product and geographic diversification strategies, agency costs of debt and asymmetric information problems may increase, thus reducing debt capacity.