The effect of capital structure on firm value for Vietnam's seafood processing enterprises

Abstract

The purpose of this paper is to investigate whether there is an optimal leverage at which point firm is able to maximize its value. An advanced panel threshold regression model is applied to test the panel threshold effect of capital structure on firm value among 92 Vietnam's seafood processing enterprises (SEAs) from 2005 to 2010. In this study, We use ROE as surrogate for firm value and debt ratio (DA) as surrogate for capital structure and as the threshold variable. The empirical results strongly indicate that two-threshold effect exists between debt ratio and firm value. Besides, the coefficient is positive when debt ratio is less than 59.27%, which implies that debt financing can improve firm value. The coefficient is negative and presents a decreasing trend when the debt ratio is between 59.27% and 94.60% or above 94.60%, implying that, in that regime, a further increase in debt financing, deteriorates firm value. We, therefore, compelled to conclude that the relationship between leverage and firm value has a nonlinear relationship represents an convex Parapol shape. The findings suggest implications for Vietnam's seafood processing enterprises (SEAs) on flexible usage of financial leverage. Specifically, SEAs should not use loans over 59.27%. To ensure and enhance the Firm value, the scope of the optimal debt ratio should be less than 59.27%.