The Deviation from Target Capital Structure and Firms’ Value

The Trade-off theory states that firms have a target (or an optimal) capital structure that maximizes the firm’s value and any deviation can decrease the firm’s value. Following the existing literature, this paper selects the capital structure determinants and using them calculates the deviation of firms’ actual capital structure from their target level, and finanlly investigates the effect of deviation from target capital structure on firms’ value. To this end, this papes uses data from 148 firms listed in Tehran Stock Exchange during 2007-2017 and also applies panel data approach and the approach to control the industry and year effects. The results indicate that an increase in deviation from the target capital structure decreases the firm’s value. The results of complementary analyses in over and under levered firms and also, the results of complementary analyses using an alternative set of capital structure determinant to calculate the capital structure deviation are consistent with the research primary results. The research results are consistent with the notions presented in Trade-off theory