Valuation Implications of Capital Structure: A Contextual Approach

Posted: 14 Nov 2001

See all articles by Begoña Giner

Begoña Giner

University of Valencia

Carmelo Reverte

Technical University of Cartagena


In this paper, the Ohlson (1995) valuation model is used to analyse the informative value of firm capital structure, decomposing the book value of equity in its two main components (i.e., total assets and liabilities) in order to test whether investors price them in a different way. We adopt a contextual approach and analyse the value relevance of debt taking into account the signalling and 'optimal' financial structure theories as well as the relationship between the cost of debt and return on investment. The sample used comprises all the non-financial Spanish firms listed in the Madrid Stock Exchange during the period 1991-1997. Our results seem to support the 'optimal' capital structure theory since departures of the debt-to-equity ratio from its 'optimal' (or target) level are negatively perceived by the market. The debt valuation parameter is higher (lower) for those firms with a cost of debt above (below) return on investment. In addition, and consistent with the signalling theory, debt seems to be a positive signal for firms facing good prospects. This effect is strongly significant for those cases in which return on investment exceeds the cost of debt.

JEL Classification: G12, G32, M40, M41

Suggested Citation

Giner Inchausti, Begoña and Reverte Maya, Carmelo, Valuation Implications of Capital Structure: A Contextual Approach. Available at SSRN:

Begoña Giner Inchausti (Contact Author)

University of Valencia ( email )

Departament de Comptabilitat Edifici Departamental Oriental
E-46022 Valencia

Carmelo Reverte Maya

Technical University of Cartagena ( email )

Faculty of Business Sciences, c/Real, 3
Cartagena, Murcia 30201
+34968325925 (Phone)

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