Abstract
This paper examines the relationships between the changes in the firm's capital structure and their effects on the firm's market value for three different levels of systematic risk. The underlying assumption of signalling is that when a firm changes its capital structure, its market value might change accordingly resulting in changes in the firm's degree of systematic risk. The results indicate that industry average debt ratio has a positive signalling effect for the medium systematic risk firms only and that liquidity, profitability, timing of equity issuance and financial flexibility are the factors which have to be considered when making debt financing decisions. The robustness of these factors indicates that they are associated with strong financial signals that carry to the investors the soundness of the borrowing decisions. These signals help the firms generate more revenue financing from the stock market.
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