Investigating the Role of Growth in Determining Capital Structure in Thai Stock Market (SET) through Signaling Game

Managerial Summary::
1️⃣ Economic Theory: Developed a signaling game theory predicting that firms with better growth prospects choose increasing financial leverage ratios
2️⃣ Statistical Modeling: Growth prospects positively determined financial leverage ratios, supporting Pecking Order mechanisms (RStudio, Tableau). The data source is accounting and financial data from 151 firms over 15 years queried by Thomson Reuters Datastream, and cleaned using Python.
3️⃣ Publication: Suggested the financial modeling of WACC with firm growth prospects. Publication at Thailand and the World Economy Journal (TWE) (VOL 39 No. 1 Jan – Apr 2021)
Technical Summary (Abstract):
In this paper, we propose a static signaling game to explain how a firm’s growth prospect can determine its leverage ratio, through an assumption of asymmetric information between a firm’s manager and an investor. Applying the solution concept of perfect Bayesian equilibrium, there exists a separating equilibrium, where a firm with better growth prospects chooses the financing option that increases leverage ratio as a signaling device. Using fixed effects model on panel data collected from listed firms in SET (2004-2018), we found that market-to-book values of assets (proxy for growth) can explain debt-to-asset (proxy for leverage ratio) positively and significantly. The empirical result supports the game model result, and this is consistent with pecking-order theory (POT) prediction, rather than trade-off theory (TOT).

Recommended citation: Visantavarakul, K. (2021). "Investigating the Role of Growth in Determining Capital Structure in Thai Stock Market (SET) through Signaling Game." Thailand and The World Economy. 39(1), 58–72. Retrieved from https://so05.tci-thaijo.org/index.php/TER/article/view/243081
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