Validity of Capital Structure Irrelevance and Relevance Theory amongst Listed Firms in Mauritius

Abstract

This study is an empirical test of the Modigliani and Miller (1958, 1963) irrelevance and relevance theories of capital structure on companies listed on the Mauritian stock exchange with a balanced panel of ten (10) non-financial firms over the period 2010 – 2019. Fixed and random regression models were used to analyze collated data from the firms' financial statements. Two dependent variables of share price and Tobin's Q were employed, while the explanatory variables include short-term loan to equity, long-term loan to equity, and debt to equity with control variables of firm size, firm age and growth. We find that in the absence of taxation, capital structure is relevant to firm's value of Mauritian listed firms but when taxation is introduced, capital structure becomes irrelevant to value of the firms. However, we also find that age is not a significant factor that drives firm's value in Mauritius, but size and growth are the dominant factors that influence Mauritian's firm value. It is, therefore, recommended that listed companies in Mauritius should focus more on their growth opportunities that align with their sizes to drive their market value.