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Valuation implications of capital structure: a contextual approach

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  • Begona Giner
  • Carmelo Reverte
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    Abstract

    In this paper, the Ohlson (1995) valuation model is used to analyse the informative value of firm capital structure, decomposing the book value of equity in its two main components (i.e., total assets and liabilities) in order to test whether investors price them in a different way. We adopt a contextual approach and analyse the value relevance of debt taking into account the signalling and 'optimal' financial structure theories as well as the relationship between the cost of debt and return on investment. The sample used comprises all the non-financial Spanish firms listed in the Madrid Stock Exchange during the period 1991-7. Our results seem to support the 'optimal' capital structure theory since departures of the debt-to-equity ratio from its 'optimal' (or target) level are negatively perceived by the market. The debt valuation parameter is higher (lower) for those firms with a cost of debt above (below) return on investment. In addition, and consistent with the signalling theory, debt seems to be a positive signal for firms facing good prospects. This effect is strongly significant for those cases in which return on investment exceeds the cost of debt.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 10 (2001)
    Issue (Month): 2 ()
    Pages: 291-314

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    Handle: RePEc:taf:euract:v:10:y:2001:i:2:p:291-314

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    References

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    1. Begona Giner & Carmelo Reverte, 1999. "The value relevance of earnings disaggregation provided in the Spanish profit and loss account," European Accounting Review, Taylor & Francis Journals, vol. 8(4), pages 609-629.
    2. Kothari, S. P. & Zimmerman, Jerold L., 1995. "Price and return models," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 155-192, September.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    4. Berger, Philip G. & Ofek, Eli & Swary, Itzhak, 1996. "Investor valuation of the abandonment option," Journal of Financial Economics, Elsevier, vol. 42(2), pages 257-287, October.
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    12. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    Cited by:
    1. José Curto & José Pinto & Ana Morais & Isabel Lourenço, 2011. "The heteroskedasticity-consistent covariance estimator in accounting," Review of Quantitative Finance and Accounting, Springer, vol. 37(4), pages 427-449, November.

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