The Traditional Approach to Valuing Levered-Growth Stocks: A Clarification

Haugen, Robert A.; Kumar, Prem

doi:10.2307/2329733

Cited by 8 publications

(7 citation statements)

References 13 publications

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“…Modigliani and Miller (1958) stated that value of a firm is independent of its source of finance, which depends on market efficiency with zero taxes, bankruptcy costs, agency costs, and zero asymmetric information. Haugan and Kumar (1974) rejected the Modigliani-Miller theorem and found the relevance of capital structure to maximize firm value. Subsequently, Viviani (2008) found the significance of capital structure and showed the ways in which an optimal capital structure helps to decrease cost of capital and increase firm value.…”

Section: Introductionmentioning

confidence: 99%

Determinants of capital structure; a sector-level analysis for Indian manufacturing firms

Panda

Nanda²

2020

IJPPM

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PurposeThe purpose of this paper is to empirically analyze the determinants of capital structure and their long-run equilibrium relationships with firm-specific and macroeconomic indicators for Indian manufacturing firms.Design/methodology/approachThe study is conducted using the panel semi-parametric and non-parametric regression models to identify the key determinants of capital structure. Panel cointegration models are also employed for analyzing the long-run equilibrium association of capital structure with its determinants.FindingsThe study finds that each manufacturing sector has unique determinants of capital structure. The debt level is significantly affected by asset tangibility, growth opportunity, effective tax rate, non-debt tax shield, cash flow, profitability, firm size, foreign investment, government borrowing, economic growth, and interest rate. All these firm-specific and macroeconomic variables have strong long-run equilibrium relationship with capital structure as a whole.Practical Implication of the StudyThe study analyzes the determinants of capital structure for eight manufacturing sectors of India, which helps firm managers and policy-makers to identify appropriate factors that maximize firm value. The sector-specific features of firms may lead to a new path with regard to corporate governance and ownership structure to enhance stakeholder's satisfaction.Originality/valueThe use of semi-parametric and non-parametric panel regression models to analyze the determinants of capital structure, and the use of panel cointegration approach to explore the long-run equilibrium relationship between the determinants and its factors are the unique contributions of the present research.

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Section: Introductionmentioning

confidence: 99%

Determinants of capital structure; a sector-level analysis for Indian manufacturing firms

Panda

Nanda²

2020

IJPPM

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“…Ever since Modigliani and Millers landmark 1958 paper, "The cost of capital, corporation finance and the theory of investment," many studies have been done on the capital structure theory. Haugan and Kumar (1974) have proven that the irrelevance theory does not hold and that capital structure is very relevant to the firm.…”

Section: Introductionmentioning

confidence: 99%

Determinants of capital structure in Australia: an analysis of important factors

Stathis

2017

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Purpose The purpose of this paper is to examine the many factors that affect the leverage decisions of publicly traded Australian companies, and tests to see whether these factors are reliably important. The relationship between these factors and the leverage decision is examined. Design/methodology/approach This study uses a multiple linear panel regressions to study the relationship between the factors and leverage. Findings The authors find a set of eight factors which are reliably important for capital structure decision making. These factors include: profitability, log of assets, median industry leverage, industry growth, market to book ratio, tangibility, capital expenditure, and investment tax credits. The empirical evidence indicates weakening support for the pecking order hypothesis and increasing support for the trade-off theory in Australia. Originality/value This paper examines the determinants of capital structure using Australian firms and provides a comprehensive empirical support for the capital structure theories.

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“…By means of a slightly modified version of the traditional model, it has been established in [15], [16], [12] that a dynamic market‐leverage hypothesis of the form (cf. (9) above),

{normalk}_{normalt} = {normalk}_{normalu} + Ɵ {normalH}_{normalt} t = 1, 2, \dots, n

…”

Section: Corporate Growth Valuation and Capital Structurementioning

confidence: 99%

“…and

{normalk}_{normalt}

is as hypothesized in (16). With (17), it has been shown, e.g., in [12] that the irrelevance proposition holds for the finite growth firm, if

Ɵ = {normalk}_{normalu} - i

. To interpret, from (17) and (2),

{normalV}_{L, 1} \equiv {normalS}_{1} + {normalD}_{1} = {normalV}_{u, 1} = \frac{({normalr}^{*} - g) {normalA}_{1}}{{normalk}_{normalu} - g} [1 - {(\frac{1 + g}{1 + {normalk}_{normalu}})}^{normaln}] + {(\frac{1 + g}{1 + {normalk}_{normalu}})}^{normaln} {normalA}_{1} .

…”

Section: Corporate Growth Valuation and Capital Structurementioning

confidence: 99%

“…Section I provides a brief introduction to the relevant literature. In Section II, some earlier results (contained in [15], [16], [12]) are succinctly discussed along with new results and recent insights: If the financial leverage variable defining a linear form of the levered equity capitalization rate is specified in terms of book values as MM's critics do, the propositions are inconsistent; interestingly, moreover, such a hypothesis leads to a counterintuitive result that the value of the levered growth firm may be less than that of the unlevered growth firm—raising questions concerning the relevance of book measures of financial leverage in the theoretical and empirical investigation of the effect of capital structure on the firm valuation. To be sure, when the financial leverage variable is specified in terms of market values—the appropriate concept under the MM theory—the inconsistency of the propositions still obtains with a naive application of the traditional model, except for one special case of constant growth to perpetuity.…”

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confidence: 99%

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