Influence Of Capital Structure On Firm's Value

Since Modigliani and Miller published their seminal paper in 1958, the issue of capital structure has generated great interests among financial academics and practices. The MM supposes that the firm's capital structure is not correlated with its value with the conditions that there are no trade cost, tax and information asymmetry. The MM theory describes the ideal status. From 1960's to 1990's, many scholars release some theoretical hypothesis of MM to meet the realities of business. And they find that there is nearly relationship between the capital structure and firm's value.This paper employs the financial data of Chinese listed companies from 2002 to 2004 to investigate the relationship between firm's value and capital structure from empirical perspective. We find that Tobin's Q shows a curve of minus second degree with debt to asset ratio and that market value to book value ratio shows a curve of positive second degree, when driving out the influence of revenue growth rate.