Abstract
The study is about the relation between the financial leverage and the value of a firm in the chemical industry. Financial stability (low level of growth and financial health) is considered as a factor that can influence the relation. The panel data analysis of the sample of public chemical companies is used. Instrumental variables are used to avoid endogenity problem of the leverage in the model. We find that the relation between the financial leverage and the value is positive. We show that the big amounts of debt past the optimum level influence company’s market value negatively. We also find that financial stability influences the relation between the leverage and the value only partly. Financial health strengthens the relation while growth has little or no influence on the relation. Testing for the change of influence patterns before and after financial crisis of 2008 gives significant difference only in relation between the value and the square financial leverage. In the first part of this work the existing body of literature on the relation between the financial leverage and the value of a company will be studied and hypotheses will be formulated. The second part will be dedicated to methodology of the study. The third part will contain the description of the data and the results of econometric analysis.
Highlights
One of the main indicators for any company is its value
Companies in chemical industry depend a lot on research and development and intangible assets
Financial stability is considered as an impact factor on the linear relation between the capital structure and the value
Summary
One of the main indicators for any company is its value. Enhancing it is often considered one of the most important aims of any business. The known relation between company’s value and financial leverage can show and aid firms’ managers the best financing strategy that will increase the value of the firm in the eyes of potential and existing investors. Companies in chemical industry depend a lot on research and development and intangible assets (which have a big share in total assets). This increases risks of bankruptcy for firms making financial leverage rather important in eyes of investors in chemical companies. Another factor that might help to make the relation more clear– the square term of financial leverage – is introduced to the analysis. Financial stability is considered as an impact factor on the linear relation between the capital structure and the value
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