DEBT, GOVERNANCE AND THE VALUE OF A FIRM

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Abstract

This paper examines the role of debt in affecting the value of a firm in the developing and the developed financial markets. The study uses panel data of 120 companies for the years 2000 to 2003 from the selected financial markets. The paper extends the literature by performing a comprehensive analysis of the relationship between debt and the value of a firm, by using a correct proxy to value a firm. Furthermore, the results are interpreted by taking into account the foundations of the developing and developed markets and different financial theories are ranked on the basis of these results of the study. The findings of the study suggest that higher debt plays a negative role in affecting the value of a firm in the selected markets showing the effect of market imperfections in the developing market. The result supports the second trade off theory and the foundation of the developed financial market. An efficient regulatory authority improves the firm’s performance by defending the rights of shareholders and reducing principal and agent conflicts. Similarly, the dual leadership structure, investors’ confidence and optimal utilization of assets improve shareholders’ value in these markets. The results are valuable to academics and policy makers as these results suggest an optimal capital structure for the firms of the selected financial markets.

Keywords: Corporate Governance, Debt, Firm Performance, Board Size and CEO Duality

How to cite this paper: Rashid, K., Islam, S. M. N., & Nuryanah, S. (2014). Debt, governance and the value of a firm. Corporate Ownership & Control, 11(2-1), 192-203. https://doi.org/10.22495/cocv11i2c1p4