The Validity and Sensitivity of Debt Signaling Hypothesis in Transitional Market : Perspectives from Egypt

This paper examines the signaling hypothesis of firm's debt on its market value in a transitional market. The methodology addresses at the first stage the determination of the relevant determinants of capital structure in a transitional economy. Next, the potential signaling effects of the relevant determinants of capital structure are examined. The robustness of the signaling effect is examined using the 'Extreme Bound Analysis'. The overall results show significant consistency which indicates that financial flexibility and interest rates are robust and significant determinants of capital structure and have signaling effects on market value. The results are consistent with other research in determinants of capital structure in other developing countries and with other related research methodology. This offers a source of validity to the relevant determinants of capital structure and their signaling effect in Egypt as a transitional market