How does market perception shape the capital structure and firm value nexus? A signaling theory perspective

This study examines the influence of capital structure on firm value, considering the moderating role of market perception. Market perception is reflective of information perceived by outsiders in the context of signaling theory. We have applied ordinary least squares (OLS) and feasible generalized least squares (FGLS) regressions to a panel data set of 281 nonfinancial firms listed at the Pakistan Stock Exchange (PSX) from 2017 to 2022. Our analysis indicates a negative influence of capital structure, measured through total, short-term, and long-term debt ratios on the firm value. Additionally, the moderating influence of market perception is found to be positive. It suggests that market perception can alleviate the adverse effects of higher debt ratios on firm value. These findings emphasize the importance of a favorable market perception along with efficient financial management for firm value. Moreover, the findings have significant implications for firms’ managers and policymakers. They must make appropriate decisions regarding capital structure and cultivate strong market perceptions that yield optimum firm value.