The Effect of Leverage and Contextual Variables on Firm Market Value

• Main Authors: Zuwei-Ching Tzeng, 曾瑞慶
• Other Authors: Ming-Chang Cheng
• Format: Others
• Language: en_US
• Published: 2014
• Online Access: http://ndltd.ncl.edu.tw/handle/45187484334456745907

博士 === 國立中正大學 === 企業管理研究所 === 102 === Using the financial data from 645 companies that were listed in the Taiwan Stock Exchange (TSE) between 2000 and 2009, this paper applied a least square dummy variable (LSDV) model to estimate the effect of leverage on firm market values and examine how contextual variables influence this relationship. The empirical results are as follows. First, the values of leveraged firms are greater than the values of unleveraged firms if we do not consider the probability of bankruptcy. If we simultaneously consider the benefits and costs of debt, we find that leverage is positively related to the firm value until a firm has issued sufficient debt to attain its optimal capital structure. Second, the positive influence of leverage on the firm value tends to be stronger for firms of higher financial quality (firms with greater Z-scores), firms with greater growth opportunities and firms with higher corporate tax rates. Third, the negative influence of leverage on firm value tends to be strengthened if increases occur in a firm’s free cash flow, a firm’s non-debt tax rate or the inflation rate it experiences. Finally, leverage may also have a positive effect on firm value provided that a firm with a higher free cash flow, a higher corporate rate or a higher inflation, is able to properly capitalize on the resultant opportunities. These findings provide insight into firms’ debt financing decisions, helping firms to maximize their values. Keywords: LSDV, Z-score, FCFPS, GTH, NDTS