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

This study investigates the nonlinear relationship between capital structure and firm value using data from manufacturing firms listed on Borsa Istanbul over the period 2005 to 2023. We use a novel methodology, the Method of Moments Quantile Regression (MMQR), and 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, while excessive borrowing beyond a threshold adversely decreases it. Causality test results indicate 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.