Capital Structure: Definitions, Determinants, Theories and Link with Performance Literature Review (Published)
The theory of capital structure and its relationship with a firm’s value and performance has been a puzzling issue in corporate finance and accounting literature since the Modigliani and Miller theory (MM) (1958) argue that under the perfect capital market condition which assume that, if without bankruptcy cost and capital markets are frictionless, if without taxes, and without asymmetric information the firm’s value is independent from capital structure. According to MM theory, the only variables that determined firm value was its future earnings power (expected cash flow) and hence the capital structure decision is irrelevant. Since that time, several theories have been developed to explain the capital structure of a firm including the Pecking Order Theory, Trade off theory, and the Agency Cost theory. This paper will shed light on the concept of capital structure, its theories and link with firms’ performance.
An Empirical Study on the Relationship between Capital Structure and Corporate Performance in China’s Food and Beverage Industry (Published)
The listed companies in China’s food and beverage industry have good profitability and low risk. They have the characteristics of stable performance growth and broad space for development. These companies have always attracted the attention of many investors and have become a unique sector in the stock market. This paper firstly sort out literature review on impact mechanism between capital structure and firm performance, and then use 58 listed companies in China’s food and beverage industry from 2011 to 2015 as sample, meanwhile dividing the companies into high-growth and low-growth companies. Finally, the empirical test was conducted with fixed effect regression respectively. The empirical results show that there is a weak degree of negative correlation between asset-liability ratio and performance of listed companies in China’s food and beverage industry. It concludes that: China’s food and beverage companies prefer equity financing, failing to make full use of financial leverage, meanwhile there is a structural imbalance in the development of capital markets.
The Relationship of the Capital Structure and Financial Performance: Empirical Evidence of Listed Banks in Thailand (Published)
This paper aims to determine the relationship between capital structure and banks’ performance in Thailand. We utilize the quarterly data set containing firm-specific characteristics and profitability from 1997 to 2016. By employing the random effect model and robustness check to tackle the endogeneity problem, the result proves that capital structure is significant and negatively correlated with profitability which implies that pecking order theory is valid in data set used. Moreover, credit risk and liquidity risk significantly decrease the financial performance. Based on the result and the theoretical background, this paper would like to suggest that governments and banks should focus on controlling the credit process to reduce the non-performing loans. Moreover, they should pay attention to the fund allocation to avoid the shortage of funding which may be costly to banks. Also, while improving banks’ financial performance, banks’ managers should be aware of over utilizing debt which reduces banks’ profitability.
Capital Structure Impact on Financial Performance of Sharia and Non-Sharia Complaint Companies of Pakistan Stock Exchange (Published)
For a firm to be profitable, it is necessary to create an optimal capital structure that contribute towards desired performance level. This study was conducted to explore the relationship between capital structure and financial performance of firms specifically with respect to shariah complaint and non shariah complaint companies. The analysis was conducted on panel data of 8 companies (3 shariah complaint and 5 non shariah complaint) listed under technology and communication sector of Pakistan Stock Exchange under the period 2009-2015. Financial Performance was the dependent variable measured by ROA and ROE while capital structure was independent variable measured by indicators, LTDR, STDR, SGR, NDTS and INSHOL. Multiple linear regression and correlation were used as statistical tools to run the model. On the basis key findings we concluded in Pakistan Shariah and non shariah companies have different pattrens of capital structure. We further concluded that capital structure effect the performance of firm in case of non-shariah but do not significantly affect performance of shariah complaint.
Good Corporate Governance, Capital Structure, and Firm’s Values : Empirical Studies Food and Beverage Companies In Indonesia (Published)
This study aims to determine the effect of good corporate governance and capital structure to the firm’s value on food and beverage companies listed on the Indonesia Stock Exchange. This study used a sample of 7 food and beverage companies listed in Indonesia Stock Exchange 2010-2014. Data type of research is secondary data obtained from the annual financial statements of the company. The analysis technique used is multiple linear regression methods using panel data random effect model approach. The results showed that simultaneous two independent variables, namely good corporate governance which is proxied by an independent commissioner, institutional ownership, managerial ownership and quality auditors, and the company’s capital structure together affect the value of the firm. Partially show that institutional ownership, managerial ownership and quality auditor affect the value of the firm. While independent and its capital structure does not affect the value of the firm.
The Effect of Capital Structure on the Financial Performance of Nigerian Quoted Conglomerates (Published)
This study investigated the effect of Nigerian banks’ capital structure on the performance of conglomerates quoted on the floor of the Nigerian stock exchange from 2011 to 2015. The paper identified four levels of dependent variables such as return on assets, ratio (ROA), return on equity ratio (ROE), assets turnover ratio (AT) and earnings per share whereas the independent variable is financial leverage. Essentially the paper sets out to determine the effect of capital structure on the above dependable variables hence return on assets of quoted conglomerates, return on equity of quoted conglomerates, asset turnover of the quoted conglomerates and on the earnings per share of quoted conglomerates. Descriptive statistics and the pooled ordinary least square (POLS) regression analytical method were used for data analysis. The study finds that capital structure has effect on both return on assets and asset turnover of the conglomerates but no effect on return on equity and earnings per share of the conglomerate. It is then concluded that an in-depth analysis of business factors which affect a particular industry should be considered so as to obtain the benefits of the debt-equity mix. The result of the study is in agreement with most previous studies on other sectors that discovered mixed results on the effect of capital structure on financial performance. It is therefore necessary to employ a critical analysis of the appropriate debt-equity mix suitable for the company.
The aim of this paper is to analyze the speed of adjustment towards the leverage target of plantation companies especially oil palm in Indonesia. The data which were used in this paper covered the years of 2009 – 2013. The used sample of the plantation companies was listed on the Indonesia Stock Exchange (IDX) and the analysis was based on the partial adjustment model. The results showed the plantation company’s internal characteristics in which the financing deficit and market capitalization affected the speed of adjustment, whereas macroeconomic condition relatively did not affect at all. This was due to the long-term investment of oil palm plantation. Although macroeconomic factors in this paper relatively did not affect the speed of adjustment of the capital structure of the oil palm plantation companies, the government must keep macroeconomic in a good condition to support the business. If an economic crisis happens, it will adversely affect the palm oil business and the financial aspect will affect the condition of the company’s capital structure to make adjustments to the target.
Stimulants of Profitability of Non-Bank Financial Institutions: Evidence from Bangladesh (Published)
Financial institutions both Bank and Non-Bank play a significant role in the economy of a country. Like other developing countries Beside the Banking industry necessarily of Non-Bank financial institutions cannot overlook in Bangladesh. This study inspects the profitability of firms in the Non-Banking Financial Institutions (NBFIs) diligence of Bangladesh. Financial Enactment of a financial organization fundamentally depends on its some key financial factors. Specially operating efficiency is main inducing factor which is designed through operating income. Besides it capital Structure combination of equity and liability, term deposit, total asset considerably affect the profitability of any NBFI company. In addition operating expense also upsets the profitability though that is not statistically significant. Different Statistical procedures such as correlation matrix, multiple regressions have been used to determine the associations between variables. And before doing regression analysis normality distribution test has been accomplished by One-Sample Kolmogorov- Smirnov Test. This research is an effort to find out the statistically significant key stimulants variable and their level of impact over net profit.
The study is focused on the analysis of the determinants of capital structure of Nigeria companies for 2013. The cross-sectional least squares regression is applied to determine the impact of two independent variables on debt ratio. The independent variables are represented by company size and profitability. It is found that profitability is not a significant determinant and has a negative impact on leverage while the impact of company size was not confirmed in the model. The analysis of the determinants of corporate capital structure has valuable implications for finance managers who can make better capital structure decisions to maximise the wealth of the shareholders.
DETERMINANTS OF CAPITAL STRUCTURE (Published)
The main objectives of this empirical study are: to investigate which factors affect the textile firms of Pakistan and which type of capital structure theory does more prevail in textile sector of Pakistan. This empirical study is done by applying the panel data techniques in analyzing sample of 68 textile firms of Pakistan listed on Karachi Stock Exchange during 2006-2012. The determinants of this study like liquidity of firms, non debt tax shields like depreciation, more collateral net fixed assets, earnings volatility, size of firms, net commercial trade position and firms’ profits have impact on the capital structure choice.
EFFECT OF COST OF CAPITAL AND CAPITAL STRUCTURE ON RETURNS: A CASE OF MOLOLINE SERVICE LIMITED IN NAKURU MUNICIPALITY, KENYA (Review Completed - Accepted)
Public transport in Kenya and, especially in urban areas, is dominated by Matatu vehicles. This venture involves substantial capital outlay and, therefore, requires sound financial management. A proper balance between return and risk should be maintained to maximize the market value of an investor. The current study investigated how cost of capital affected returns and the impact of capital structure on returns in the public service vehicle Matatu industry in Nakuru Municipality in Kenya. The findings indicated that most respondents preferred equity (μ = 4.25; SD = 0.907) to debt (μ = 3.47; SD = 1.030) as a source of capital. A major hindrance to the use of debt is its high cost. However, debt was invariably used because of its security and access. Capital structure consisted of shareholders and non-shareholders. In conclusion, MSL should seek alternative ways for members to access loans at lower rates; for instance entering into funding commitments with the financial institutions. Additionally, it should plan to access a wider pool of equity financing by listing in the capital markets
An Empirical study of the Capital Structure of Micro, Small and Medium Scale Enterprises in Nigeria (Review Completed - Accepted)
The analysis of capital structure of organizations has conventionally been applied to corporate entities. Previous studies on Microfinance have classified enterprises into two broad categories-the Small and Medium scale enterprises respectively. Micro-scale businesses are conventionally grouped with Small scale enterprises without specifically analysing their businesses. The research therefore examines the capital structure of micro, small and medium scale enterprises (MSMEs) as well as the factors influencing it. Primary data were collected by administering 300 copies of research instrument with a combination of cluster and simple random sampling techniques. The research discovered that there is a significant difference in the Capital Structure of Nigerian MSMEs; there is no statistically significant difference between the Capital Structure of Nigerian MSMEs at start-up and the Capital Structure at continuation; and the factors influencing the patronage of bank and non-bank finance providers among MSMEs do not significantly differ