Threshold Effect of Capital Structure on Firm Value

The purpose of this paper is to investigate whether there is an optimal capital structure at which point firm is able to maximize its value. The author employ an advanced panel threshold regression estimation developed in 1999 by Hansen that will indicate whether there are positive and negative impacts of capital structure on firm value. The author has used data of among 90 unlisted Seafood Processing Enterprises in the South Central region of Vietnam (SEASCRs) during 2005–2011 period. The author has used book value of equity plus long- term debt (BVE) and return on equity (ROE) as surrogate for firm value and book value of total debt to total assets (TD/TA) as surrogate for capital structure and as the threshold variable. The empirical results strongly indicate that triple threshold effect exists between debt ratio and firm value when BVE is selected to proxy firm value. However, when ROE is selected to proxy firm value, the result shows that there exists double thresholds effect between debt ratio and firm value. From these results, the author  may conclude that the relationship between capital structure and firm value has a nonlinear relationship represents an convex Parapol shape. In addition, the findings suggest implications for SEASCRs on flexible usage of financial leverage. Specifically, SEASCRs should not use loans over 57.39%. To ensure and enhance the firm value, the scope of the optimal debt ratio should be less than 57.39%.