Empirical evidence on the relationship of capital structure and the value of the firm among Mexican public firms

Abstract

This paper estimates the impact of capital structure changes on the market value of a sample of 69 non-financial firms listed in the Mexican Stock Exchange, during the period 2004 to 2014. Using Pooled Ordinary Least Squares (OLS), Fixed Effects (FE) and Random Effects (RE) regressions, we confirm the extensively documented positive influence of leverage on firm value; i.e. there is a clearly positive and statistically significant relationship between changes in financial leverage (debt ratios and debt to invested capital) and changes in Tobin’s Q (our proxy variable for firm value). When the sample is distributed in sub samples of firms with low and high leverage, small and big size, low and high profitability, or low and high risk, the financial leverage coefficients vary in magnitude and, in the case of debt ratios, remain highly significant. Our main contribution consists in the analysis of the estimated parameters, contributing to a better understanding of the impact of financial leverage changes on the value of different types of firms. These findings have important implications for corporate financial strategies, as well as for portfolio managers’ investment choices.