Product market performance and capital structure: A Hierarchical Bayesian semi-parametric panel regression model

The relationship between product market performance of a firm and its capital structure has drawn considerable amount of attention recently amongst corporate finance researchers. The same was established to be non-monotonic in the context of a developed market. The non-monotonicity in the functional form could be expressed by pieces of straight lines joined at different values of debt (or knots). In this paper we address the issue of estimating the slopes of different line segments along with the positions of the knots from a panel of firms using an adaptive hierarchical Bayesian semi-parametric regression model. Further,keeping in mind that such a relationship is less investigated in emerging economies where the debt market dynamics may be different we investigate the same for an emerging economy. In the process we provide the economic rationale for varying sign and magnitude of the slopes of the line segments discussed above.