Trade off theory of capital structure choice and its relevance for emergent markets: the Romanian case

摘要

Standard corporate finance theory supposes that a company chooses a capital structure that maximizes company value. The capital structure of a company is basically described by the two main elements that characterize its debt: financial leverage and maturity. Optimal leverage represents a compromise between the "nominal" stream of tax benefits generated by debt, and the probability of this stream being received. This paper briefly tries to determine a relation between financial leverage and Price Earnings Ratio (PER). The main hypothesis is that such a relation reflecting in fact the linkage between the choice of capital level and structure and the market value of the company. For this purpose, we conduct an empirical research that covers 46 selected companies traded at the Bucharest Stock Exchange within the time period 2005-2009. Our main results reveal a negative relation between the ratios mentioned. Such output suggests that the earnings effect of changes in financial leverage prevails on price adjustments effects.