New Applicable Approach to Examine The Leverage–Value Relationship

Abstract

Many literatures studied the relationship between the leverage and the value of firms. Some studies found no relationship and other studies show that the relationship is positive, however, another studies show that the relationship is negative. Therefore, the leverage-value relationship seems to be an unresolved puzzle in the capital structure empirical literature.Therefore, this study seeks to examine the leverage-value relationship to interpret the significant and the direction of this relationship by using the effect of industry, size firm's growth opportunities and adding operating efficiency as controlling factors. The importance of this study is to investigate the impact of unique status of the Saudi market companies that have not tax on its profits and illustrate whether the leveragevalue relationship hold in the Saudi companies. Moreover, this study seeks to help managers make efficient financial decisions and realize the effect of their decisions on the firm value with considering the impact of industry and the internal level of firm performance such as their growth opportunities and their operating efficiency on the leverage-value relationship.The results show that leverage for both firm and industry (book or market) as well as the difference between firm leverage and the industry leverage have a significant negative effect on both the firm value and the difference between firm value and the industry value. These results are found in spite of the difference among firms in growth opportunities or in operating efficiency.

Evaluate Multifactor Asset Pricing Models , to Explain Market Anomalies, Applicable Test in the Saudi Stock Market

“…So negative relationship between the leverage factor and the average returns of 25 size-B/M portfolios is founded. This result on (lev) is similar to that shown by Mahran (2015) who found that in spite of the difference among firms in growth opportunities or in operating efficiency, the leverage (book or market) have a significant negative effect on both the firm value and the difference between firm value and the industry value in the Saudi stock market.…”