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

Kartal Demirgunes

International Journal of Financial Research, 2017, vol. 8, issue 2, 75-91

Abstract: This study aims to analyze the possible asymmetric causal relationship between capital structure and firm value by employing 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 explicitly, a decrease in total debt ratio leads to a decrease in the market-to-book value ratio. Considering the effect of only negative shock, this empirical finding also supports partial evidence to the validity of trade-off theory which predicts a positive relationship between debt level and firm value.

Keywords: capital structure theories; trade-off theory; pecking order theory; firm value; asymmetric causality (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:jfr:ijfr11:v:8:y:2017:i:2:p:75-91

DOI: 10.5430/ijfr.v8n2p75

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