Capital Structure Choice and Firm Value: New Empirical Evidence from Asymmetric Causality Test

Abstract

This study aims to analyze the possible asymmetric causal relat ionship between capital structure and firm value by emp loying the asymmetric causality test of Hatemi-J (2012), on a time series data of Turkish manufacturing industry (consisting of Borsa Istanbul listed manufacturing firms) for the period of 1990.Q1-2015.Q4. Test results point out a unidirectional asymmetric causal relationship between capital structure and firm value, indicating that capital structure Granger-cause firm value when shocks are negative, but not when shocks are positive. More exp licit ly, a decrease in total debt ratio leads to a decrease in the market-to-book value rat io. Considering the effect of only negative shock, this empirical finding also supports partial evidence to the validity of trade-off theory which pred icts a positive relationship between debt level and firm value.

Pengaruh Profitabilitas, Struktur Modal, Ukuran Perusahaan, Dan Good Corporate Governance terhadap Nilai Perusahaan

“…Menurut Demirgunes (2017) struktur modal merupakan perimbangan antara total hutang dan total modal. Apabila nilai struktur modal meningkat karena tidak melakukan pertimbangan besarnya biaya tetap yang muncul dari hutang bunga berupa bunga akan menyebabkan semakin meningkatnya nilai struktur modal.…”

Financing of state-owned entities: Can the Trade-off Theory explain the debt structure?

“…Both categories can be modeled into either a static or dynamic framework. The dynamic version of the first category of theories is associated with adjustment behavior toward the target debt level while the second category of theories is not associated with targets; instead, the non-target factors include the cost of adverse selection for the pecking order theory and the mispricing of common stock relating to the market timing theory (Demirgüneş, 2017;Grosse-Rueschkamp et al, 2019).…”

Capital Structure Theories: A Comprehensive Review

“…According to traditional theory, by selecting suitable blend of debt, an optimum capital structure can be achieved for a firm. Fundamentally, this theory explains that the existence of optimal or appropriate capital structure for a firm can be detected when the cost of capital, that is weighted average cost, is minimized and value of a firm is at its peak (Demirgüneş, 2017). Furthermore, this theory also assumes that if a business continues getting debt from other sources, then later at a certain point, its value become constant and then slowly it starts to drop down (Abdul Hadi, Pyeman and Ismail, 2017).…”