The effect of leverage on firm value

Abstract

This study examines the impact of leverage on firm value in the SBF 120 index, considering Modigliani and Miller’s work, Trade-Off theory, and Pecking Order theory. Using dynamic panel data models, it tests four hypotheses on leverage, bankruptcy risk, internal financing, and firm value.Findings confirm that leverage increases firm value due to market imperfections, supporting the U-shaped hypothesis and Trade-Off theory’s optimal leverage balance. The results also align with Pecking Order theory, showing that firms relying on internal financing enhance value by minimizing information costs and equity dilution.By integrating theoretical and empirical literature on capital structure, the study provides managerial insights on optimal leverage and internal financing strategies. Though focused on French firms, its implications extend to various economic and geographic contexts, emphasizing the strategic use of leverage in complex financial systems.