Does debt diversification impact firm value? Brazilian evidence

Johnny Silva Mendes, Wilson Toshiro Nakamura and Antonio Zoratto Sanvicente

No 572, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: This paper discusses recent literature about the benefit of debt diversification, which either considers the reduction in the cost of debt or the increase in equity value. We argue that the former, published in Brazil with Brazilian firm data, is not an appropriate goal of debt diversification. We then adapt our analysis to consider the maximization of equity value is the appropriate goal. The proxy for equity value is the price-to-book ratio. We also include the change in equity risk premia over time as an independent variable to explain changes in equity value. This is ignored in the literature in which equity value is the dependent variable. The analysis uses annual data for the 2012-2021period and 158 non-financial firms, employing the estimation of the basic panel data econometric specification with fixed effects. Our results indicate that debt structure policy does not affect market values and that, if anything, it is done to favor creditors’ and/or managers’ interests in contrast with maximizing shareholder wealth. In fact, a significant variable is return on assets, a firm performance indicator that is independent of debt structure or leverage.

Date: 2025-02-25
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