Central European Business Review 2019, 8(3):1-17 | DOI: 10.18267/j.cebr.218

How Capital Structure Affects Business Valuation: A Case Study of Slovakia

Katarina Valaskova1, George Lazaroiu2, Judit Olah3, Anna Siekelova4, Barbora Lancova5
1 University of Zilina, Slovakia, katarina.valaskova@fpedas.uniza.sk
2 Spiru Haret University, Romania, phd_lazaroiu@yahoo.com
3 University of Debrecen, Hungary, olah.judit@econ.unideb.hu
4 University of Zilina, Slovakia, anna.siekelova@fpedas.uniza.sk
5 University of Zilina, Slovakia

A company’s capital structure is a significant factor in valuing its business. The relative levels of equity and debt affect risk and cash flow and, therefore, the amount an investor would be willing to pay for the company or an interest in it. Capital structure matters because it influences the cost of capital. Therefore, this paper aims to quantify the effect of the capital structure on the cost of capital of Slovak enterprises and to suggest an effective way of financial decision-making. The data used in the study was gained from the Bratislava Stock Exchange because publicly available information on enterprises issuing their shares on the stock exchange was needed to calculate the cost of capital. Due to the underdeveloped capital market of Slovakia, we chose 17 stock companies (except for commercial banks) operating on the Slovak market having all the data required. The financial data of companies were obtained from their financial statements spanning 2013 to 2017. The impact of the capital structure on the cost of capital was investigated by the Pearson correlation coefficient, regression analysis and Mann-Whitney U-test. The study found that there is an indirect relationship between the capital structure, the cost of capital and the size of the company. We also conclude that the growing volume of debt may result in a decline in the corporate costs of capital. These findings concerning Slovak enterprises incline to the respected compromise theory.

Keywords: capital structure, cost of debt, cost of equity, cost of capital
JEL classification: D24, G32

Received: June 30, 2019; Revised: August 1, 2019; Accepted: August 22, 2019; Prepublished online: September 23, 2019; Published: October 1, 2019  Show citation

ACS AIP APA ASA Harvard Chicago Chicago Notes IEEE ISO690 MLA NLM Turabian Vancouver
Valaskova, K., Lazaroiu, G., Olah, J., Siekelova, A., & Lancova, B. (2019). How Capital Structure Affects Business Valuation: A Case Study of Slovakia. Central European Business Review, 8(3), 1-17. doi: 10.18267/j.cebr.218
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Andrijauskiene, M., & Dumciuviene, D. (2018). National culture as a determinant of firms´ innovative performance. Forum Scientiae Oeconomia, 6(1), 47-67.
    2. Bae, K. H., El Ghoul, S., Guedhami, O., Kwok, C., & Zheng, Y. (2019). Does corporate social responsibility reduce the costs of high leverage? Evidence from capital structure and product market interactions. Journal of Banking & Finance, 100, 135-150. Go to original source...
    3. Baker, M., & Wurgler, J. (2015). Do strict capital requirements raise the cost of capital? Bank regulation, capital structure, and the low-risk anomaly. American Economic Review, 105(5), 315-320. Go to original source...
    4. Balcerzak, A. P., Kliestik, T., Streimikiene, D., & Smrcka, L. (2018). Non-Parametric Approach to Measuring the Efficiency of Banking Sectors in European Union Countries. Acta Polytechnica Hungarica, 14(7), 51-70. Go to original source...
    5. Barclay, D. L. (1991). A statistical note on trend factors: The meaning of R-squared. Casualty Actuarial Society Forum, 3, 7-18.
    6. Barclay, M. J., & Smith, C. W. (1995). The maturity structure of corporate debt. Journal of Finance, 50(2), 609-631. Go to original source...
    7. Damodaran, A. (2019a). Total betas by sector (for computing private company costs of equity) - US. Retrieved May 12, 2019, from http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/totalbeta.html.
    8. Damodaran, A. (2019b). Country default spreads and risk premiums. Retrieved May 7, 2019. from http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/ctryprem.html.
    9. Durica, M., Podhorska, I., & Durana, P. (2019). Business failure prediction using cart-based model: A case of Slovak companies. Ekonomicko-manazerske spectrum, 13(1), 51-61. Go to original source...
    10. Franek, J., & Kashi, K. (2017). Application of hybrid MADM methods for performance evaluation in manufacturing. Forum Scientiae Oeconomia, 5(2), 41-54.
    11. Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: Which factors are reliably important? Financial management, 38(1), 1-37. Go to original source...
    12. Gapenski, L. C. (1987). An empirical study of the relationships between leverage and capital costs for electric utilities. Florida: Public utility research center.
    13. Gavurová B., Misankova, M., Packova, M., & Smrcka, L. (2017). Predictive potential and risks of selected bankruptcy prediction models in the Slovak business environment. Journal of Business Economics and Management, 18(6), 1156-1173. Go to original source...
    14. Khadka, H. B. (2006). Leverage and the cost of capital: Some tests using Nepalese data. The Journal of Nepaleses Business Studies, 3(1), 85-91. Go to original source...
    15. Kisgen, D. J. (2006). Credit ratings and capital structure. Journal of Finance, 41(3), 1035-1072. Go to original source...
    16. Kliestik, T., Kovacova, M., Podhorska, I., & Kliestikova, J. (2018). Searching for key sources of goodwill creation as new global managerial challenge. Polish Journal of Management Studies, 17(1), 144-154. Go to original source...
    17. Kliestikova J., Misankova, M., & Kliestik, T. (2017). Bankruptcy in Slovakia: international comparison of the creditor´s position. Oeconomia Copernicana, 8(2), 221-237. Go to original source...
    18. Korajczyk, R. A., & Levy, A. (2003). Capital structure choice: macroeconomic conditions and financial constraints. Journal of Financial Economics, 68(1), 75-109. Go to original source...
    19. Kristofik, P. (2002). Determinants of capital structure and financial decision-making in Slovak enterprises. Ekonomicky casopis, 50(2), 197-216.
    20. Locke, S. M., & Wellalage, N. H. (2014). The capital structure of Sri Lankan companies: A quantile regression analysis. Journal of Asia-Pacific Business, 15(3), 211-230. Go to original source...
    21. Luigi, P., & Sorin, V. (2009). A review of the capital structure theories. Annuals of Faculty of Economics, 3(1), 315-320.
    22. Meyer, N. (2019). South African female entrepreneurs´ business styles and their influence on various entrepreneurial factors. Forum Scientiae Oeconomia, 7(2), 25-35.
    23. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297.
    24. Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions: When firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221. Go to original source...
    25. Nenu, E. A., Vintila, G., & Gherghina, S. C. (2018). The impact of capital structure on risk and firm performance: Empirical evidence for the Bucharest Stock Exchange listed companies. International Journal of Financial Studies, 6(2), 41. Go to original source...
    26. Neter, J., & Wasserman, W. (1974). Applied linear statistical models: regression, analysis of variance and experimental designs. Homewood: Irwing, Inc.
    27. Nicodemus, K. M. (2017). Capital structure on the cost of capital of firms listed at the Nairobi securities Exchange. International Journal of Finance and Accounting, 2(1), 84-105. Go to original source...
    28. Nipun, A., Kwan, P., & Paul, D. (2018). Merger and Acquisition Pricing Using Agent Based Modelling. Economics, Management, and Financial Markets, 13(1), 84-99. Go to original source...
    29. Pakurar, M., Haddad, H., Nagy, J., Popp, J., & Olah, J. (2019). The impact of supply chain integration and internal control on financial performance in the Jordanian banking sector. Sustainability, 11(5), 1248-1268. Go to original source...
    30. Rajverma, A. K., Arrawatia, R., Misra, A. K., & Chandra, A. (2019). Ownership structure influencing the joint determination of dividend, leverage, and cost of capital. Cogent Economics & Finance, 7(1), 1-25. Go to original source...
    31. Ramalho, J., Rita, R. M., & Da Silva, J. V. (2018). The impact of family ownership on capital structure of firms: Exploring the role of zero-leverage, size, location and the global financial crisis. International Small Business Journal, 36(5). 574-604. Go to original source...
    32. Reznakova, M., Svoboda, P., & Polednakova, A. (2010). Determinants of capital structure: Empirical evidence from Slovakia. Ekonomicky casopis, 58(3), 237-250.
    33. Sadaf, R., Olah, J., Popp, J., & Mate D. (2018). An investigation of the influence of the worldwide governance and competitiveness on accounting fraud cases: A cross-country perspective. Sustainability, 10(3), 588-599. Go to original source...
    34. Strebulaev, I. A. (2007). Do tests of capital structure theory mean what they say? Journal of Finance, 62(4), 1747-1787. Go to original source...
    35. Villadsen, B., Vilbert, M., Harris, D., & Kolbe, L. (2017). Risk and return for regulated industries. London: Academic Press, Ltd - Elsevier Science, Ltd. Go to original source...
    36. Vochozka, M., Kliestik, T., Kliestikova, J., & Sion, G. (2018). Participating in a Highly Automated Society: How Artificial Intelligence Disrupts the Job Market. Economics, Management, and Financial Markets, 13(4), 57-62. Go to original source...
    37. Xu, S., Liu, D., & Huang, J. (2015). Corporate social responsibility, the cost of equity capital and ownership: An analysis of Chinese listed firms. Australian Journal of Management, 40(2), 245-276. Go to original source...
    38. Zhou, Q., Tan, K. J. K., Faff, R., & Zhu, Y. S. (2016). Deviation from target capital structure, cost of equity and speed of adjustment. Journal of Corporate Finance, 39, 99-120. Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content