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

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  • Kartal Demirgunes

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.

Suggested Citation

  • Kartal Demirgunes, 2017. "Capital Structure Choice and Firm Value: New Empirical Evidence from Asymmetric Causality Test," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 8(2), pages 75-91, April.
    • Handle: RePEc:jfr:ijfr11:v:8:y:2017:i:2:p:75-91
    DOI: 10.5430/ijfr.v8n2p75
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