Corporate governance, product market competition and dynamic capital structure

- We examine the adjustment speed of firms' capital structure toward the target level.
- The adjustment speed is slower for firms with weak governance than those with strong governance.
- Market competition makes the difference in adjustment speed between weak and strong governance firms less obvious.

Although the importance of both product market competition on managerial slack and the impact of corporate governance on capital structure decisions have been widely discussed in many of the prior related studies, it appears that very little attention has been paid to the effect of market competition on the relationship that exists between corporate governance and capital structure dynamics. Based upon an examination of this relationship in the present study, we find that product market competition increases the incentives for firms with weak governance structures to maximize the wealth of shareholders, thereby increasing the adjustment speed toward target leverage. Furthermore, the difference in such adjustment speed between firms with weak and strong governance structures is found to be smaller among firms operating in the highly competitive industries.