Investigation of Optimal Capital Structure: A Panel Threshold Regression Analysis over Egyptian Non-Financial Firms

Abstract

The purpose of this quantitative research is to investigate whether non-linear effects of capital structure choice on firm value are present for the Egyptian non-financial firms, and if yes, investigate the existence of an optimal capital structure that maximizes firm value.

The authors employ the advanced panel threshold regression developed by Hansen (1999) to investigate the existence of threshold(s) effect of firm leverage on firm value. This estimation technique is superior over the traditional non-linear regressions and has been extensively used to estimate threshold effect in different financial applications.

This research is intended to fill literature gap where there is lack of empirical studies investigating the existence of optimal capital structure in Egypt. Too, inclusion of political uncertainty among controlling variables falls outside the conventional use of firm-specific variables; the action that best suits the Egyptian market that was subject to political changes during the past years. Outcome of this study shall contribute to better understanding of implications of the choice of capital structure as one of the important and complex decisions in finance.

Research results revealed robust, linear and negative effect of firm leverage on firm value in the presence of four controlling variables (firm size, assets growth, sales growth and political uncertainty). Firm value is found to be affected by firm size, assets growth and political uncertainty.