Capital Structure Decisions and Firm Value: Evidence from Emerging Economies

Abstract

This study examines the relationship between capital structure decisions and firm value in emerging economies. The objective is to investigate how leverage influences firm valuation while considering firm-specific characteristics and macroeconomic conditions. Using panel data from publicly listed firms across selected emerging economies over the period [Year–Year], the study employs fixed effects, random effects, and Generalized Method of Moments (GMM) estimations to address endogeneity concerns. Firm value is measured using Tobin's Q and Market-to-Book Ratio, whereas capital structure is represented by debt-to-equity ratio and total debt ratio. The findings indicate that moderate levels of leverage positively influence firm value; however, excessive debt significantly reduces firm performance and market valuation. Profitability, firm size, growth opportunities, and asset tangibility also play significant roles in determining firm value. The study supports the Trade-off Theory while providing partial evidence for the Pecking Order Theory in emerging markets. The findings offer valuable implications for corporate managers, investors, and policymakers seeking to optimize financing decisions in developing economies.

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