Informative value of firm capital structure

Abstract

This paper analyzes the informative value of the capital structure of firms. In the first part, a theoretical background regarding theories of capital structure is presented. In the second (and empirical) part, the Ohlson (1995) valuation framework is used in order to analyze the informative value of firm capital structure on a sample of data from non-financial Czech companies. A contextual approach is adopted and the value relevance of debt is analyzed considering signaling and optimal capital structure theories. According to the results, and in accordance with optimal capital structure theory, debt is more penalized in the case of companies that had deviated from the target debt level. Moreover, debt proved to be a positive signal for firms with a higher earnings growth potential. This, in turn, is consistent with signaling theory.