Investigating the non-linear relationship between capital structure and firm value: A focus on the family firms of textile sector in Pakistan

Abstract

This study is focused to investigate the capital structure-firm value relationship in family firms of textile sector in Pakistan. The study also researches if capital structure-firm value relationship is linear or non-linear in nature? Three measures of capital structure have been employed including Leverage 1, Leverage 2 & Leverage 3. The Generalized Method of Moments is used to examine the relationships. The findings indicate mixed results. Both Leverage 1 & Leverage 2 show negative effect whereas Leverage 3 reveals positive link with firms’ value. Further, when examining the non-linearity of the relationships, the findings suggest that at lower of leverage, it negatively affects the firms’ value whereas at higher levels it shows strongly positive relationships. Both positive and negative performance implications are consistent. Family firms have easy access to debts due to internal networks of resource sharing and however, severe agency conflicts are well pronounced in these firms. The debt financing brings the family firms under the additional monitoring of the lending institutions that is helpful in mitigating agency conflicts among the controlling family shareholders and minority shareholders and thus affects positively the firm value.