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Contents
The Objective 2
Hypothesis 2
Literature Review 2
Research Methodology 3
Data Analysis 4
Practical Value 4
Refrences 5
The objective:
The aim of this research paper is to investigate the impact of capital structure (Debt – Equity) on the company’s value listed in the Dubai Financial Market DFM. The research will attempt to identify the role of capital structure and other market and economic variables in business valuation. The following questions will be used as guidelines:
Is really capital structure irrelevant as per Modigliani and Miller’s capital structure irrelevance theory?
What is the capital structure of companies listed in DFM?
What are the long term and short term debt structure?
Hypothesis:
Is there a positive impact of capital structure (Debt to Equity) on the company’s value quoted in DFM?
Is there a negative impact of capital structure on the company’s value quoted in DFM?
Literature Review:
There is a little empirical sign of a correlation between the trends of capital structure and the value of a firm for companies listed in DFM. The models of optimal capital structure and with the help of the hypothesis there is evidence of dependency.
There is a study done by Abu-Bader & Abu- Qarn (2018) and they observe the key correlation between financial development and economic growth. Five Middle Eastern and North African (MENA) countries used this data for diverse periods extending from 1960 to 2004. They examine the four different methods of financial development and tried to relate Granger causality tests via the co integration and vector error-correction (VEC) methodology. The empirical results depict the weak maintenance for prolonging relationship between financial development and economic growth and for the hypothesis that economics principal’s growth. Granger causality was found to be bidirectional or it has not seen from output to economic, in cases where co integration was spotted.
“Both Achary, & Pedersen (2005) review this paper to solves clearly a stability asset pricing model with fluidness risk; the risk of retiring from impulsive changes in liquidity over time. In their liquidity-adjusted capital asset pricing model, a security’s required return depends on its expected liquidness as well as on the covariance of its own return and liquidness with market return and market liquidness. In calculation, the model showed how a negative shock to a security’s liquidity, if it is determined, results in low contemporaneous returns and high forecast future returns. The model offered a simple, united framework for understanding the several channels through which liquidness risk may affect quality prices. Their empirical results shelter light on the total and relative economic implication of these stations”.
There are limited studies on the impact of capital structure in UAE; therefore, we have only a little information about how those companies listed in DFM make decisions with respect to their capital structure. Thus, it’s important to deliberate the capital structure of companies listed in DFM in UAE.
This study paper might be useful to fill up the research gap which exists in the literature and can help us to better understand the capital decisions taking by companies listed in DFM.
The research study would also be beneficial for the investors as they will come to know is to whether the capital structure affects their investment capital and thus enable them to make informed decisions.
Research Methodology:
This research study will be carried out in companies that are listed in DFM to determine the impact of capital structure on the firm’s value using a sample covering the period of 5 years from 2013 to 2018. Financial firms will be excluded from the study as their capital structure differs significantly from non financial companies. 12 companies will be selected from different industries as a representative sample. The financial data is the primary data that will be used and will be obtained from the company’s financial statement and Bloomberg or other economic news agencies. Debt to Equity ratio will be used to determine the capital structure.
Data Analysis:
Regression analysis and correlation coefficient models will be used to interpret the collected data in order to answer the research questions. Regression analysis is a technique used to determine the nature of the relationship among the variables, whereas, correlation coefficient is a technique that is used to calculate and measure the strength of the relationship between those two variables. Interviews will be conducted to support the analysis. The required data for the research would be largely financial. The collected data on DFM companies will be analyzed and interpreted using a tool pack (E-views) and econometric techniques. Empirical research and relevant theories will be reviewed in order to develop a suitable structure to test and assess the hypothesized relationships. Debt to equity will be used to measure the capital structure that would be extracted from the financial statement which contains the spread sheet comprises of debt and resources. The primary sources of data would be mainly drawn from the company’s financial statements and Dubai Financial Market. DFM is the preferred source of data for the research. The second sources of data would be Bloomberg, Newspapers, Published Articles, Books, Internet and Past Student Papers.
Practical Value:
The problem may arise is that there will be a threat that the data might change over time. Furthermore, the following limitations exist in the study:
The sample of the research study is limited to the firms listed on DFM.
The sample of the research study is small and may not represent the whole population.
The difficulty of obtaining the data.
Time Frame:
References:
Abu-Bader, S., and A. Abu-Qarn. (2008), financial development and economic growth: Empirical evidence from six MENA countries.
Acharya, V., and. L. Pedersen. (2005) Asset pricing with liquidity risk. Journal of Financial Economics.
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