Application of Advanced Panel Threshold Regression Model to Estimate Optimal Capital Structure

Modern capital structure theory started in 1958, when Modigliani and Miller （1958）(M&M hereafter) first brought out “Capital Structure Irrelevance Theory”, advocated that the firm value and weighted average cost of capital (WACC) is unaffected by the financial structure of the firm. The goal in this paper is to analyze whether leverage affects firm value for a panel of Persian listed companies during the period 2009 to 2015.. ROA, ROE, EPS and Tobing’s q are adopted as proxy variables for firm value. The result shows that there exists single threshold effect between debt ratio and firm value only when Tobing’s q is selected as the proxy variable for the firm value. The estimated threshold value ( ) is found to be 37.84% and two coefficients ( and ) are all positive with the evidence that the in the low debt level is significant, while the in the high debt level is not. Advanced panel threshold regression model is performed to test if there exists an “optimal” debt ratio , which may result in threshold effects and asymmetrical relationships between debt ratio and firm value Keywords: panel threshold regression model, Tobin’s q, Firm Value, Capital Structur