The valuation effects of long-term changes in capital structure

Purpose – This paper aims to test the irrelevance proposition whereby changes in capital structure do not affect firm value. Design/methodology/approach – The long-run effect of changes in capital structure on firm value is examined, using a sample of 243 French firms over the period 1987-1996. Findings – The null hypothesis cannot be rejected. No evidence is found to support a significant relationship between the changes in debt ratios and the changes in value. To assess the strength of this finding, control for reversion towards the target debt level induced by the static trade-off theory is introduced. Similar results were obtained. Originality/value – This paper is one of the first to analyze the long-term relationship between financial structure changes and value, and to propose a direct test for the irrelevance proposition.