The valuation effects of long‐term changes in capital structure

Cécile Carpentier

33 citations0/0 files storedInternational Journal of Managerial Finance

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Corporate Finance and Governance Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

Purpose This paper aims to test the irrelevance proposition whereby changes in capital structure do not affect firm value. Design/methodology/approach The long‐run effect of changes in capital structure on firm value is examined, using a sample of 243 French firms over the period 1987‐1996. Findings The null hypothesis cannot be rejected. No evidence is found to support a significant relationship between the changes in debt ratios and the changes in value. To assess the strength of this finding, control for reversion towards the target debt level induced by the static trade‐off theory is introduced. Similar results were obtained. Originality/value This paper is one of the first to analyze the long‐term relationship between financial structure changes and value, and to propose a direct test for the irrelevance proposition.

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References

1958The Cost of Capital, Corporation Finance and the Theory of Investment 1997Legal Determinants of External Finance 2008The cost of capital, corporation finance and the theory of investment 1995What Do We Know about Capital Structure? Some Evidence from International Data 2001The theory and practice of corporate finance: evidence from the field 1991The Theory of Capital Structure 2002Market Timing and Capital Structure 2002Testing Trade-Off and Pecking Order Predictions About Dividends and Debt

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