Signaling Corporate Market Value in Transition Economies: Perspectives from Egypt

Abstract

This paper examines the dynamic determinants of signaling firm’s market value. The underlying assumption is that when a firm changes its capital structure, it actually changes the relative position and the market values of its capital suppliers’ securities holdings. As for the determinants of capital structure, the paper examines a comprehensive number of factors that have been examined or pointed out in the literature. The paper utilizes the properties of partial adjustment model where the desired (or target) level of market value is adjusted according to both of the changes in actual market values and changes in firm’s capital structure. The results indicate that firm’s market value is not affected by neither factors of tradeoff theory nor free cash flow theories of capital structure. If firm’s liquidity position is taken as a source of short‐term financing, the results indicate that factors of pecking order theory do exist. The premises of dividend irrelevancy and information asymmetry do exist with a negative estimate of the dividend payout ratio. The results also indicate that firms’ financial‐agency signaling is affected by eight factors. These factors are (1) debt financing, (2) bankruptcy risk, (3) type of industry, (4) size, (5) financial flexibility, (6) liquidity position, (7) interest rate and (8) transaction costs of borrowing or paying off debt.