Capital Structure And Firm Value Pdf
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- Impact of capital structure on firm value: Evidence from Tehran Stock Exchange
- Capital Structure and Firm Size on Firm Value Moderated by Profitability
- Capital structure, profitability and firm value: panel evidence of listed firms in Kenya
- Impact of capital structure on firm value: Evidence from Tehran Stock Exchange
Impact of capital structure on firm value: Evidence from Tehran Stock Exchange
Email: oroud. This study aims to investigate the moderating role of profitability in the relationship between capital structure and firm value in Jordan, as an example of an emerging economy. For this purpose, two functional models were formulated to capture the direct relationship as well as the interaction impact of capital structure on firm value. The robust empirical findings of panel data analysis provide strong evidence of an adverse relationship between capital structure and firm value.
The findings confirm that the impact of capital structure appears to be complicated in nature and difficult to examine without controlling for the interaction of profitability as one of the major determinants.
Therefore, studying the interaction effect provides ample evidence and enhances the understanding of the link between firm value and capital structure. The empirical results of the study may provide important insights and policy implications to decision-makers.
Financing decisions constitute one of the most vital decisions for a corporation's chief financial officer. This decision-making involves an efficient mixing of different available financing sources debt vs. Constructing an optimal capital structure leads also to momentum in the development of firms. Therefore, capital structure decisions dynamically affect firm value and are an essential and inextricable part of the stockholders' goal of wealth maximization.
The importance of incorporating capital structure decisions is first highlighted by the pioneering work of Modigliani and Miller The study argues that firm value is not affected by the combination of capital structure irrelevant proposition ; assets allocation investment decisions is the main determinants of firm value.
Under real market conditions, the suggestion of irrelevant proposition is unrealistic. In , Modigliani and Miller developed their second proposition after including the benefits of tax shield, achieved by using debt in the capital structure. Based on this latest proposition, firm managers may prefer to use more debt to attain stockholders' wealth maximization as represented by firm value.
Subsequently, two theories have been developed to provide additional explanations about the capital structure-firm value relationship: the trade-off theory and the pecking order theory.
Therefore, optimal capital structure depends on balancing both tax shield benefits and cost of financial distress. However, the pecking order theory of Myers and Majluf presumes that highly profitable companies tend to finance their activities with low level of debt. In light of the contradicting arguments in theoretical and empirical studies, the present study suggests that the relationship between capital structure and firm value must be examined from another perspective, taking into consideration prior evidences showing that the study of the impact of capital structure decisions is complicated and difficult without controlling for the interaction of its major determinants.
Therefore, this study investigates the moderating role of profitability in the capital structure-firm value relationship of the firms listed on the Amman Stock Exchange ASE in Jordan.
To the best of the authors' knowledge, this is the first study that investigates the interaction of profitability in this relationship. Thus, the findings of the present study may provide important insights and policy implications for decision-makers. Jordan is selected as an emerging economy of interest due to many reasons: Jordan's economy is one of the emerging economies in the Middle East region that has an underdeveloped financial market with limited financing channels.
The country's financial system is bank-based, which means that the banking sector of Jordan plays a critical role in the economy and is a key source of funds for companies. At the same time, the limited number of banks in Jordan pose crucial challenges for financial managers to find the needed funds without restrictive conditions. With a relatively high tax rate compared to its neighboring countries, companies in Jordan tend to increase their indebtedness to achieve more tax benefits.
And, finally, during the last decade, there were several political issues in the region that have affected the financial position of Jordanian firms. The rest of this research paper is organized as follows: 1.
Literature review is presented in section 2. Research methodology is summarized in section 3. Section 4 presents discussions of the empirical results. Finally, section 5 summarizes the main conclusions and policy implications. Several empirical studies have argued about the role of capital structure in firm value.
An unanswered question in this discussion is whether or not an individual firm has the optimal capital structure that can affect its market value.
In this regard, Ross as well as Brealey, Leland and Pyle illustrated that firm value increases as the degree of leverage increases. Therefore, managers attempt to use optimal debt level to positively affect firm value; this is true in case of no conflict of interest between principal and agent.
This point of view is confirmed also by Kochhar and Sander : an individual firm can construct its optimal capital structure by efficient mixing of fund resources, which will positively influence firm value. A related study by Stulz founds inconsistent results; this study asserts that using debt among capital structure components may affect firm value in a bidirectional manner, either positively or negatively.
In terms of capital structure influences, Pandey states that managers should pay considerable attention to capital structure decisions to attain the stockholders' wealth maximization goal. From another perspective, a massive number of studies have examined the relationship between financial performance and capital structure.
Among the various financial performance indicators, profitability gauges are used as proxies of financial performance, which are strongly associated with a firm's capital structure. Jensen and Meckling have argued about the possible association between capital structure and firm performance since In this respect, Kinsman and Newman illustrated that studying this relationship will have crucial implications for decision-makers and investors for many reasons: first, firms' debt level has increased sharply during the last few decades; second, there is an inherent possible conflict of interest between manager and principal regarding the appropriate degree of leverage; and finally, such a study can reveal critical signals about the shareholders' wealth maximization progress.
Numerous researchers have provided mixed and inconsistent results about this relationship. All they asserted that using financial leverage is one of the main ways to improve the financial performance of levered companies. Ahmed et al. This literature review evidences a lack of studies on capital structure in emerging economies since the majority of studies have been done in the context of developed economies.
In this regard, very few studies have tested the link between capital structure and profitability as proxies to measure the financial performance of firms in developing economies. For example, in Hong Kong, Yat Hung et al. Kyereboah-Coleman evinced the same relationship between the degree of financial leverage and ROE as well as return on assets ROA , as measures of financial performance in sub-Saharan Africa.
In Pakistan, Saleem et al. Contrasting results on the relationship between capital structure and various profitability measurements were found by Majumdar and Chhibber in their study of Indian companies. In Jordan, Zeitun and Tian found a negative relationship between capital structure and financial performance, measured by market and accounting indicators.
Finally, in the Republic of Mauritius, Ramlall confirmed the arguments of the pecking order theory about an inverse relationship between capital structure and profitability, which is attributed to a preference for internal self-financing over borrowed funds. In this study, the sample includes all firms listed on the ASE during the period of , except for banks and insurance companies. This period was chosen as it provides the most recent available data. A total of firms were listed on the ASE during the period of the study with a total of observations.
Similar to earlier studies, secondary financial data is the main source, gathered from the annual reports of listed companies available on the ASE website. It is argued that secondary data is more suitable than primary data as it is usually permanent, available, and can be easily checked Denscombe, As mentioned above, many studies have investigated the relationship between capital structure and firm value e. However, to the best of our knowledge, very few studies have looked into a possible interaction of profitability as a moderator in the capital structure-firm value relationship.
Thus, the present study attempts to contribute to the body of knowledge by considering the moderating effect of profitability in this relationship, as represented in Figure 1. Source: Author's elaboration. In this study, firm value is measured by Tobin's Q ratio.
Capital structure is gauged by debt ratio, while profitability is measured by operating profits to assets, which is calculated as earnings before interest and tax EBIT over total assets.
In order to capture the influence of other factors, the study used a set of control variables, i. The abbreviations and measurements of variables are represented in Table 1. Table 1. This research is based on two functional models. The first one is presented in Equation 1 to examine the direct impact of capital structure on firm value:. The second model, Equation 2, explains the role of profitability as a moderator variable in the capital structure-firm value relationship:.
A panel data analysis is adopted to examine the main functional models, which is the most commonly used analysis in accounting and finance studies. Panel data, also known as cross-sectional time-series data or longitudinal data, is typically represented by data about several individual aspects observed over a period of time. Therefore, panel data observations usually include a minimum of two aspects: a time-series dimension represented by t; and a cross-sectional dimension represented by Hsiao, In this type of analysis, a fixed-effects or a random-effects model is applied to control for heterogeneity in panel data regression Wooldridge, Baddeley and Barrowclough as well as Wooldridge explained the importance of taking into consideration the individual factors of panel data observations, which remain constant over time and cannot be assumed as independently distributed across time, whereas pooled ordinary least squares OLS estimation may introduce bias in the results, which then can lead to incorrect inferences and cannot be applied to panel data.
In pooled OLS, firm-specific factors are not considered when applied to panel data, which results in autocorrelation as there is no isolation between years in the same firm. In general, the Hausman test compares fixed-effects to random-effects coefficients to decide which model is appropriate.
If the p-value is significant, then the fixed-effects model should be applied since using random-effects would be biased. However, if the p -value is insignificant, random-effects can be safely used Wooldridge, In the current study, the Hausman test was applied to the two models and the results show significant p -values for both models, which means that a fixed-effects model should be adopted.
In panel data, even if the variance of errors is constant between cross-sectional observations, it may differ within observations through time, which raises the issue of groupwise heteroscedasticity Baum, According to Baltagi , ignoring the presence of heteroscedasticity can result in inefficient coefficient estimations and biased standard errors.
Accordingly, the modified Wald test for groupwise heteroscedasticity is used to check the existence of the heteroscedasticity problem. With regard to the heteroscedasticity problem in tested models, the robust covariance matrix estimation of Driscoll and Kraay is employed to correct and avoid this problem.
Thus, robust results are presented after controlling for the possibility of existing heteroscedasticity problem. The direct impact of capital structure on firm value of Model 1 was tested and the empirical outcomes are reported in Table 2. The estimations show that capital structure negatively affects firm value at significance level of 10 percent with estimated coefficient value of Furthermore, the estimated coefficients of control variables demonstrate that firm size and growth have a positive and significant impact on firm value.
Kumar, Colombage and Rao postulated that firm size and growth seem to have a positive impact on firm value as it is believed that larger firms with higher growth tend to have more financing flexibility as they enjoy economies of scale.
In contrast, business risk negatively affects firm value at significance level of 0. Firms with volatile returns may have financing disability that limits their fund resources, which, at the same time, adversely affects the market value of their stocks.
Regarding the diagnostics of the overall model, the F -test indicates that the estimated model is suitable at the significance level of 0. Table 2. The estimated interaction of profitability as a moderator variable in the relationship between capital structure and firm value is summarized in Table 3. Compared to the estimations of Model 1, capital structure still negatively affects firm value with a higher coefficient value of The significance level of this coefficient is 0.
This can be attributed to a moderator variable being used to capture the interaction effect.
Capital Structure and Firm Size on Firm Value Moderated by Profitability
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Email: oroud. This study aims to investigate the moderating role of profitability in the relationship between capital structure and firm value in Jordan, as an example of an emerging economy. For this purpose, two functional models were formulated to capture the direct relationship as well as the interaction impact of capital structure on firm value. The robust empirical findings of panel data analysis provide strong evidence of an adverse relationship between capital structure and firm value. The findings confirm that the impact of capital structure appears to be complicated in nature and difficult to examine without controlling for the interaction of profitability as one of the major determinants.
Capital structure, profitability and firm value: panel evidence of listed firms in Kenya
Kodongo, Odongo and Mokoaleli-Mokoteli, Thabang and Maina, Leonard : Capital structure, profitability and firm value: panel evidence of listed firms in Kenya. This paper investigates the relationship between leverage and the financial performance of listed firm in Kenya. We use annual data for the period —
Impact of capital structure on firm value: Evidence from Tehran Stock Exchange
The paper aims at providing insights on the relationship between capital structure and performance of the firm by employing meta-analytical approach to obtain a synthesized result out of controversial studies as well as the sources for such inconsistency. Using secondary data, the analysis is divided into two main parts with concerns to the overall strength of the relationship, the effect size and the potential paper-specific characteristics influencing the magnitude of impacts between leverage and firm performance moderators of the relationship. Overall, a total number of 32 journals, reviews and school presses were selected besides online libraries and publishing platforms. There were 50 papers with studies chosen from to , of which data range from to Using Hedges et al. The estimation induces rather small effect size that implies sufficiently large sample size to be effectively investigated.
Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: Hirdinis Published Business Journal of economics and business administration. The purpose of this study is to determine the effect of capital structure and firm size on firm value, moderated by profitability. The sample of this research is mining sector companies listed on IDX. This research uses the non-participant observation method with path analysis technique.
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Items in DSpace are protected by copyright, with all rights reserved, unless otherwise indicated. Show full item record. Effect of capital structure on firm value: a case study of listed manufacturing firms in Ghana. Adu, Godfrey Owusu. Ghana stock exchange Long term debt Capital structure. Previous empirical literature demonstrates conflicting results on the effect of capital structure on firm value.