Superstar firms: Capital structure and effects on the distribution of corporate leverage ratios
Author
Ramírez Rodríguez, Gadiel
Advisor
Rodríguez, JavierType
DissertationDegree Level
Ph.D.Date
2022-05-11Metadata
Show full item recordAbstract
In this doctoral dissertation we investigate the capital structure of superstar firms and how the same forces behind their creation differentially affect peer industry firms. Using a quintile distribution of industry operating profit margins (Lerner Index) to proxy for the within industry market power distribution we were able to improve the descriptive capabilities of the typical analyses of leverage evolution and capital structure regression. Our leverage evolution analysis confirms that within industry competition has waned over time, going from a competitive state (1973-1982) to a concentrated state (2010-2020). A key characteristic of industry superstars is their ability to withstand macroeconomic factors better than peers. Innovation helps firms compete for stardom, but reigning stars do not appear particularly innovative. The series are shown to financially behave as two distinct power blocks which suggests the existence of a threshold value for both market power and industry concentration. Our regression analyses confirm a dynamic relation between financial leverage and market power (industry concentration). Aggregating data along the within-industries channel of leverage variation reveals that the high-power block increasingly substitutes profit margin benefits for those provided by financial debt. The low-power block, limited in options, uses debt strategically weighting the benefits of financial debt against distress costs and expropriation risks. When the data is instead aggregated along the between-industries channel, industry concentration progressively reduces aggregate levels of corporate debt within the high-concentration block of industries. For the low-concentration block of industries, characterized by healthy levels of industry competition, neither profit margins nor distress costs seem to be a factor. However, along these two channels debt levels are shown to increase with profitability which indicates the strategic perspective implicit in these results. It also explains why it would be difficult for basic regression models to describe such a dynamic interaction as they lack the full spectrum of the industry (concentration) effects on the financial structure of firms (industry). In fact, our results show that even at the individual firm level, the inclusion of the market power distribution for the industry improves the descriptive power of the regression model.