IDEAS home Printed from https://ideas.repec.org/a/taf/euract/v10y2001i2p291-314.html
   My bibliography  Save this article

Valuation implications of capital structure: a contextual approach

Author

Listed:
  • Begona Giner
  • Carmelo Reverte

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.

Suggested Citation

  • Begona Giner & Carmelo Reverte, 2001. "Valuation implications of capital structure: a contextual approach," European Accounting Review, Taylor & Francis Journals, vol. 10(2), pages 291-314.
    • Handle: RePEc:taf:euract:v:10:y:2001:i:2:p:291-314
    DOI: 10.1080/09638180126637
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09638180126637
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09638180126637?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. William P. Rees, 1997. "The Impact of Dividends, Debt and Investment on Valuation Models," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7‐8), pages 1111-1140, September.
    2. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    5. Stephen H. Penman, 1998. "Combining Earnings and Book Value in Equity Valuation," Contemporary Accounting Research, John Wiley & Sons, vol. 15(3), pages 291-324, September.
    6. Masulis, Ronald W, 1983. "The Impact of Capital Structure Change on Firm Value: Some Estimates," Journal of Finance, American Finance Association, vol. 38(1), pages 107-126, March.
    7. Joos, P & Lang, M, 1994. "The Effects Of Accounting Diversity - Evidence From The European-Union," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 32, pages 141-168.
    8. Eckbo, B. Espen, 1986. "Valuation effects of corporate debt offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 119-151.
    9. 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.
    10. 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.
    11. 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.
    12. Penman, SH, 1996. "The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 34(2), pages 235-259.
    13. Begoña Giner & William Rees, 1999. "A Valuation Based Analysis of the Spanish Accounting Reforms," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 3(1), pages 31-48, March.
    14. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1998. "Relative valuation roles of equity book value and net income as a function of financial health," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 1-34, February.
    15. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    16. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    17. Bernard, Vl, 1987. "Cross-Sectional Dependence And Problems In Inference In Market-Based Accounting Research," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 25(1), pages 1-48.
    18. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    19. Harris, Ts & Lang, M & Moller, Hp, 1994. "The Value Relevance Of German Accounting Measures - An Empirical-Analysis," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 32(2), pages 187-209.
    20. Mary E. Barth & Sanjay Kallapur, 1996. "The Effects of Cross†Sectional Scale Differences on Regression Results in Empirical Accounting Research," Contemporary Accounting Research, John Wiley & Sons, vol. 13(2), pages 527-567, September.
    21. William P. Rees, 1997. "The Impact of Dividends, Debt and Investment on Valuation Models," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7&8), pages 1111-1140.
    22. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
    23. Schipper, Katherine & Smith, Abbie, 1986. "A comparison of equity carve-outs and seasoned equity offerings : Share price effects and corporate restructuring," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 153-186.
    24. Kothari, S. P. & Zimmerman, Jerold L., 1995. "Price and return models," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 155-192, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Patrik Bauer & Vít Bubák, 2003. "Informative value of firm capital structure," Prague Economic Papers, Prague University of Economics and Business, vol. 2003(3), pages 233-248.
    2. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    3. John R. M. Hand & Wayne R. Landsman, 2005. "The Pricing of Dividends in Equity Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(3‐4), pages 435-469, April.
    4. Nwaeze, Emeka T., 2005. "Replacement versus adaptation investments and equity value," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 523-549, June.
    5. 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.
    6. Juan Manuel García Lara & Beatriz García Osma & Araceli Mora, 2005. "The Effect of Earnings Management on the Asymmetric Timeliness of Earnings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(3‐4), pages 691-726, April.
    7. Igor Goncharov & David Veenman, 2014. "Stale and Scale Effects in Markets-Based Accounting Research: Evidence from the Valuation of Dividends," European Accounting Review, Taylor & Francis Journals, vol. 23(1), pages 25-55, May.
    8. Benjamin Kleidt & Eckhard Scharmer & Dirk Schiereck, 2009. "Desinvestitionen von Aktienpaketen — Eine Analyse von Exchangeable Bonds," Schmalenbach Journal of Business Research, Springer, vol. 61(7), pages 738-780, November.
    9. Kathryn E. Easterday & Pradyot K. Sen, 2023. "Another look at the dividend-price relationship in the accounting valuation framework," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 879-925, October.
    10. Mark Aleksanyan & Khondkar Karim, 2013. "Searching for value relevance of book value and earnings: a case of premium versus discount firms," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 489-511, October.
    11. Luc Renneboog & Peter G. Szilagyi, 2008. "Corporate Restructuring and Bondholder Wealth," European Financial Management, European Financial Management Association, vol. 14(4), pages 792-819, September.
    12. Yushu Zhu, 2017. "Call it good, bad or no news? The valuation effect of debt issues," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1203-1229, December.
    13. Palea Vera, 2013. "Capital Market Effects of the IFRS Adoption for Separate Financial Statements: Evidence from the Italian Stock Market," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201309, University of Turin.
    14. Robert M. Hull & George E. Pinches, 1995. "Firm Size and the Information Content of Over-the-Counter Common Stock Offerings," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 4(1), pages 31-55, Spring.
    15. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.
    16. Oliveira, Lídia & Rodrigues, Lúcia Lima & Craig, Russell, 2010. "Intangible assets and value relevance: Evidence from the Portuguese stock exchange," The British Accounting Review, Elsevier, vol. 42(4), pages 241-252.
    17. Ahmed Sakr & Amina Bedeir, 2019. "Firm Level Determinants of Capital Structure: Evidence From Egypt," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(1), pages 68-85, January.
    18. Mustaruddin Mustaruddin & Aristya Dinata & Wendy Wendy & Anwar Azazi, 2017. "Asymmetric Information and Capital Structure: Empirical Evidence from Indonesia Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 8-15.
    19. Palea, Vera, 2014. "Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 23(1), pages 1-17.
    20. Karampinis, Nikolaos I. & Hevas, Dimosthenis L., 2011. "Mandating IFRS in an Unfavorable Environment: The Greek Experience," The International Journal of Accounting, Elsevier, vol. 46(3), pages 304-332, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:euract:v:10:y:2001:i:2:p:291-314. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/REAR20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.