Inverted U-shaped dynamics of capital structure and firm value: Evidence from an emerging market

Abstract

This study investigates the nonlinear relationship between capital structure and firm value using data from manufacturing firms listed on Borsa Istanbul over the 2005–2023 period. We use a novel methodology, namely moments-quantile regression (MMQR). We also perform several robustness checks using the novel JKS half-panel jackknife estimation method, and the Lag Augmented VAR (LA-VAR) panel causality test. Our results show the presence of an inverted U-shaped nonlinear relation between the capital structure and firm value. Specifically, higher borrowing increases firm value in the lower quantiles; however, excessive borrowing beyond the threshold adversely decreases it. Causality test results indicate that there is a unidirectional causality from capital structure to firm value. The results have implications for management in manufacturing industries and policymakers and enhance our understanding of how firms should restrict their borrowing to optimize firm value, maintain financial stability, and foster sustainable growth.