n Management Dynamics : Journal of the Southern African Institute for Management Scientists - The discounted value premium : a new way of looking at the capital structure puzzle

Volume 23, Issue 1
  • ISSN : 1019-567X



This study introduces, for the first time, two new terms to the capital structure literature, namely 'operational optimal capital structure' and 'discounted value premium'. Operational optimal capital structure is defined as the capital structure that allows a firm the financial flexibility to enable it to access and restructure its financing at minimal cost. Discounted value premium is defined as the spread between the value of the firm at theoretical optimal and operational optimal leverages. The study documents, again for the first time, that manufacturing, mining and retail firms listed on the Johannesburg Stock Exchange (JSE) have a significant positive discounted value premium. The discounted value premium is greatest for mining firms and smallest for retail firms. It is also greatest for medium-sized firms and smallest for small firms. These results imply that the operational optimal capital structure is lower than the theoretical optimal capital structure, and hence a positive discounted value premium.

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