The Empirical Analysis of the Influence of Capital Structure on Corporate Value

With the expansion of the companies’ scale and the improvement of their decision-making level, companies not only concern the scale of financing, but also pay more attention to the ways of financing and the capital structure in order to enhance the company’s market value and achieve the best interest of investors. This thesis aims at figuring out whether there are relations between company’s capital structure and their enterprise value and if the relation exists, how the capital structure may influence the firm’s value and whether an optimal structure does exist for the companies to maximize their value. This paper presents empirical findings through establishing the relationship that exists between the capital structure choices of firms and their return on equity and Tobin’s Q (a market performance measure). Other factors that may influence firm value such as size, liquidity, profitability, growth opportunity and industry were also selected as control variables. The study employed panel data analysis by using Pooled OLS, Fixed-effect estimation and GMM. The usual identification tests and the Hausman’s Chi-square statistics for testing whether the Fixed Effects model estimator is an appropriate alternative to the Random Effects model were also computed for each model. The empirical results based on 2001 to 2010 accounting and marketing data for 40 quoted firms confirm the effect of capital structure on firm value as well as prove the existence of an optimal capital structure for the companies. In addition, the study also shows that industries have influence on the relationship between firm value and capital structure