Determinants of Firm Value in Frontier Markets: Evidence from a Panel Oprobit Analysis in Sri Lanka

Abstract

This study explores the firm-level determinants of firm value in the context of a frontier market, using a panel dataset of 222 companies listed on the Colombo Stock Exchange from 2013 to 2024. Employing panel probit and ordered probit models, the analysis examines how capital structure, investment decisions, profitability, firm size, and sector classification influence firm value, measured across three distinct valuation tiers. The results reveal that the debt-to-equity ratio positively impacts firm value, especially during transitions from low to medium categories, supporting the relevance of the Trade-Off Theory. Profitability and firm size are also found to significantly increase the probability of achieving higher firm valuations. However, the price-to-earnings ratio displays negligible predictive power in this context. Sectoral analysis indicates that non-financial firms demonstrate stronger valuation potential than financial firms, likely due to reduced regulatory constraints and greater strategic flexibility. These findings contribute to the limited empirical literature on frontier markets by highlighting key drivers of corporate value and providing comparative insights. The study offers practical implications for policymakers, investors, and corporate managers aiming to enhance firm value through financial structure optimisation, strategic growth initiatives, and regulatory improvements that promote market confidence and transparency.