The objective of the study is to investigate the relationship between capital structure and performance of selected banks in Ghana as measured by ROA and ROE. The paper also looked at the macroeconomic impact on the banks performance. Theoretical literature of capital structures, specifically the Modigliani-Miller theorem, tradeoff theory and pecking order theory were reviewed to provide a sufficient understanding of how capital structure could affect firm performance. The extensive amount of related empirical literature was reviewed to identify the proxies and measurements for capital structure, financial performance and several control variables to be the relationship. To this end two dependent variables were used as a measure of performance, namely return on asset (ROA) and return on equity (ROE). The capital structure is represented by short term debt (STD), long term debt (LTD) and total debt (TD). Four variables found by most literature to have an influence on firm performance, namely, size, asset tangibility, tax rate and total asset, are used in this study as control variables. To account for the macroeconomic effect on capital structure inflation and GDP growth were adopted in the model as a control variable. Two general pooled regression models are utilized, one with ROA as the dependent variable and the other one as ROE as the dependent variable. A series of regression analysis were executed for each model. The study used descriptive statistics to assess the relationship between the variables. The results of the correlation matrix reveals short-term debt and long-term debt to be highly correlated in both models. To this effect variance inflation factor were performed. This was to avoid possible multicollinearity among the variables. To this end short-term debt was dropped from the models. The study registered asset tangibility to be significant in both models, tax rate and long-term debt were found to be significant in the ROE model but insignificant in the ROA model. Total debt were also found to be insignificant in both models. The macroeconomic variables, GDP growth was registered to be significant in both models. This signifies that macroeconomics matter in the banks capital structure and performance. This is consistent with the work of DeAngelo and Masulis (1980). Interestingly inflation was not to be significant, Implying that inflation does not have a profound effect on banks capital structure in Ghana.
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The research work was designed to evaluate capital structure and the performance of quoted companies in Nigeria. The focus was to identify the relationship that exists between capital structure and performance indices such as the net profit margin, return on assets and return on equity. The theoretical component of the study attempted to evaluate the major contending theories of capital structure with the purpose of finding the best empirical explanation for corporate financing choice of a cross section of 94 Nigerian quoted companies. The result showed that Capital mix has a significant relationship with the earnings per share of quoted firms in Nigeria. Debt equity ratio has a significant positive impact on the return on assets of quoted companies in Nigeria and debt asset ratio has a significant inverse relationship with the return on assets of quoted companies in Nigeria. Also debt equity ratio has a significant inverse impact on the return on equity of quoted companies in Nigeria and debt asset ratio has a significant positive impact on return on equity of quoted companies in Nigeria. Quoted companies in Nigeria should invest their profits when there are good investment opportunities and pay cash dividend as soon as enough income is generated. Keyword: Earnings per share, Return on equity, return on assets, Debt stock, Debt/asset ratio
The difficulty facing firms in Nigeria has to do more with the financing – whether to raise debt or equity capital. The issue of finance is so important that it has been identified as an immediate reason for business failing to start in the first place or to progress. Thus it is necessary for firms in Nigeria to be able to finance their activities and grow over time, if they are ever to play an increasing and predominant role in creating value added, as well as income in terms of profits. From the foregoing, it is therefore important to understand how firm‟s financing choice affects their performance. It is evidently clear that both internal (firm specific) factors and external (macroeconomic) factors could be very important in explaining the performance of firms in an economy. Thus, the central point of this study is to assess the impact of capital structure on firm‟s performance in Nigeria. A theoretical and empirical analysis of the lowly and highly geared companies in Nigeria will be critically assessed. Furthermore, macroeconomic factors alongside firm‟s specific factors that could drive the performance of Nigeria firms will be closely considered.
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The capital structure is a very important subject in the field of financial management because it partly affects its financial performance. The main aim of conducting this study was to investigate the impact of capital structure (Debt, Equity ratio) on financial performance measured by EPS, Return on Investment, Capital Turnover, Debt to Net Worth, Net Profit Ratio, Return on Capital Employed and Return on Equity. On the basis of objectives the data from mainly three sectors were taken from 2003-2012 of 60 listed companies taken from automobile, electronic and metal industries. The analysis was done by applying correlation and regression statistics. The findings indicated that the capital structure has a no significant impact on financial performance in the automobile sector on the other hand electronic and metal sector had shown that financial performance was significantly affected by capital structure. An insignificant either negative or positive relationship was observed between dependent and independent variables.
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Jensen and Meckling (1976) demonstrates that in the decisions about a companies’ capital structure, the agency creates conflicts between managers and shareholders and is affected by the leverage levels, as it has to constrain or encourage managers to take decisions in the interest of shareholders and their operating decisions and behaviors affects the companies’ performance. In similar way, importance of capital structure decisions in firm performance were explored both empirically and theoretically. Banerjee and Jain (1999)examined the relationship betweencertain financial variables and shareholder wealth. This research is conducted with a sample of top 50 companies from Drugs and Pharmaceutical industry. This studyconcluded that out of selected independent variables, EVA has been proved to be most explanatory variable and the capital productivity is a predictor of shareholder wealth.
This study seeks to investigate the impact of capital structure on firm performance in Nigeria for period of 2013 and 2017. The study considered the impact of some key macroeconomic variables (gross domestic product and inflation) on firm performance. The traditional theory of capital structure was employed to determine the significance of leverage and macroeconomic variables on firm’s performance. A static panel analysis was used to achieve the objectives of the study. Using fixed effect regression estimation model, a relationship was established between performance (proxied by return on investment) and leverage of the firms over a period of five years. The results provide strong evidence in support of the traditional theory of capital structure which asserts that leverage is a significant determinant of firms’ performance. A significant negative relationship is established between leverage and performance. From the findings, the study strongly recommended that firms should use more of equity than debt in financing their business activities; this is because in spite of the fact that the value of a business can be enhanced with debt capital, it gets to a point that it becomes detrimental. Each firm should establish with the aid of professional financial managers, that particular debt-equity mix that maximizes its value and minimizes its weighted average cost of capital.
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The study investigated the dynamic relationship between capital structure and firms’ performance in Nigeria from 1990 to 2016. The methodology employed in this work involved panel unit root and cointegration tests. Also, panel vector autoregressive distributed lag was employed to analyse the data. The findings revealed that there were long run relationship among capital structure variables and measures of firms’ performance in Nigeria during the period under review. The results also showed that, throughout the period, none of the other variables’ shocks in the system accounted for any variations in the returns on asset (ROA), given variance error decomposition’s statistics. Similarly, both in the short and long run, innovations from capital market structure were not statistically significant in explaining forecast error variance occurred to profit margin (PRM). The result implied that neither long term debts, short term debts, nor equity had strong relationship with PRM. Arising from these findings, the study could not find dynamic relationship between capital structure and firms’ performance in economy of Nigeria.
The interconnectedness between capital structure and firm performance is a topic of high interest among scholars and management alike. The scholars tend to unveil the why segment of the relationship, while the management looks into the how side to promote capital structure policy which can optimise the firm performance. While many studies have looked into this relationship across multiple industries and spanning across decades of data, the current study trains its lens on Malaysian public listed company companies which operate in the construction sector, and with data window between 2010 to 2014. This specific sector was chosen for their high gearing which renders firms to relatively high insolvency exposure emanating from interest rate fluctuations. The five-year timeframe was selected to isolate potential data contaminations streaming from global financial crisis which winds down in 2009. Financial data of the company were extracted from Bloomberg Terminal based on a pre-prepared list of Bloomberg tickers. A total of 225 observations were recorded in this study. Using Tobin’s Q as a proxy for firm performance, this study finds a mixed result where short term debts ratio indicates a significant negative effect, while long term debt ratio presents a non-significant influence. Explanations on this output are therefore discussed in this paper.
This study investigated the impact of capital structure on financial performance of Malaysian construction firms. The empirical data was taken from 41 construction firms listedon the main board of Bursa Malaysia and observed from 2011 to 2015. Capital structure is the financing decision on the proportion between debt and equity. The right proportion leads to optimal capital structure. This study adopts two theories namely trade-off theory and pecking order theory, to explain the concept of optimal capital structure. Capital structure is the independent variable and is measured by short-term debt (STD), long-term debt (LTD), total debt (TD), meanwhile the dependent variable, financial performance, is proxy by return on asset (ROA) and return on equity (ROE). The results indicated positive and significant association between LTD and ROE. However, STD was significant but negatively correlated with ROE. Meanwhile, TD was positive but insignificantly associated with ROE. Nevertheless, STD, LTD and TD were negatively and insignificantly associated with ROA. The findings suggested that financing decisions are influenced by the objective of the firms. If the goal of the firms was to maximize return on asset, the pecking order theory was employed, however if the firms’ objective was to maximize return on equity then the trade-off theory was appropriate to explain the concept of optimal capital structure. The concentration on one industry and the relatively narrow five-year period for data collection were the main limitations of this study. The findings of the research will contribute towards capital structure literature.
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Table 2 (as shown below) summarises the descriptive statistics of the dependent and explanatory variables used in this study. The performance of commercial banks measured by ROE has a mean value of 84.4%. This means that commercial banks performance for the period considered is high. It is also an indication of higher efficiency of capital invested by shareholders. The mean values of the capital structure components (short-term debt, long-term debt, and total debt to total capital) are estimated at 47.7%, 63.6%, and 111.4% respectively. This shows that commercial banks in Ghana are highly leveraged and use more long-term debt than short-term debt. With the control variables, the average values of bank size and liquidity are 6.33 and 63.6% respectively. The mean value of liquidity largely exceeds the 28.3% minimum liquidity requirements of commercial banks in Ghana as at 2013.
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This study examines the capital structure of selected construction companies in India between the periods 2009 to 2013. Emphasis has been laid to show the impact of capital structure on the financial performance of Indian construction companies listed in the Bombay Stock Exchange. For the study purpose, the data has been collected from the secondary sources i.e. from the annual reports of the selected sample companies. Multiple Regression and correlation is used to analyze the data. The variables used for the study are Debt Equity Ratio, Long term debt and Debt Asset Ratio as the independent variable and Gross Profit Margin (GPM), Net Profit Margin (NPM), Return on Capital Employed (ROCE), Return on Assets (ROA) and Return on Equity (ROE) as the dependent variables. The result revealed that there is a positive relationship between the capital structure and financial performance of the selected firms.
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Stock Exchange and concluded that working capital management affects profitability of the company and if the firm can effectively manage its working capital, it can lead to increasing profitability. In the same year 2011, Caffaso in her study on the relationship between working capital management financing policy and profitability among manufacturing firms in Kenya concluded that there was negative relationship between ROA and financing working capital policy. Peviously, Zulqar & Mustafa (2007) examine the relation between capital structure and performance of firm. Result shows that there is a relationship between capital structure and firm performance. Furthermore, Tapanjeh (2006) examined the relationship between firm’s structure and profitability by using data from 48 Jordanianlisted industrial companies at Amman Stock Exchange for a period of one decade, from 1995-2004. His findings showed that total debt to asset ratio proxy for capital structure has a positive significant ralation with return on equity whereas firm size illustrated significant negative relation with ROE thus stated that capital structure is a useful issue affecting on firm performance.
The paper aims to investigate the effects of capital structure on banks’ performance on Ugandan banks for a ten years period, 2006 – 2015 with a sample of 20 commercial banks. The study employs four performance indicators of return on equity, return on assets, net interest margin and cost to income ratio to determine bank performance. Panel regression models are used to determine the effects of capital structure on bank performance. Independent variables are sub‑divided into capital structure variables namely; long‑term debt to total assets, short‑term debt to total assets and total debt ratio and then control variables are bank size and tangibility of assets. Results portray that there is a positive relationship between capital structure variables and bank performance. It’s between long‑term debts, total debt with net interest margin. There is also a positive relationship between total debt and return on assets. It is still the same between total debt and returns on equity. However, there is a negative relationship between short‑term debt and return on assets. The results also signify a positive relationship between bank size and net interest margin. It is still the same between bank size and returns on equity plus return on assets. There is a negative relationship between the tangibility of assets and net interest margin. It is also the same with return on equity. The findings propose that profitable banks rely more on debt financing as their financing option. This is advanced by the fact that approximately 68 % of total assets are represented by short‑term debts for Uganda’s commercial banks. This further implies that Ugandan banks largely depend on short‑term debt financing for their business operations compared to long‑term debt. Hence the study recommends that executive banking management teams plus policymakers should design prudent financing decisions aimed at reducing overreliance on debts to yield optimal capital structure levels. This will enable banks to remain at the top of the profitability game competitively in the banking industry.
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The notion of contemporary theory of capital structure is the pathway breaking contribution of Modigliani and Miller (1958) in the perfect capital market postulation. Modigliani and miller (1958) postulate that under condition of no bankruptcy cost and frictionless capital markets without taxes firm’s value is independent of its capital structure. Alternatively, other school of thought holds that financing choice reveals an attempt by corporate managers to balance tax guard of higher debt beside potential huge cost of financial distress arising from under investment (Awunyo, 2012). In addition much debt can destroy firm’s value by causing financial distress and under investment then too little debts can also leads to over investment and negatively affect returns particularly in large and mature firms (Barclays and Smith, 2005).The choice of capital structure and its subsequent risk experience is very vital in economic performance of every company. Hence, the choice of debt or equity ultimately results in the growth value of investment made by numerous sets of investors particularly equity investors (Watson and Head, 2007). This is essential because of the fact that equity investors have greater expectation of returns on their investment in the form of higher dividends and capital gain (Sulaiman, 2001). Any result different to this expectation will make holders of equity shares sale off their shareholding which can lead to the fall in the share price of the company. The fall in share price is an indicator to potential investors of the poor performance of the company and thereby discouraging potential investors from investing mutually in equity stock and debt.
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This study examines relations between capital structure decisions and firm performance for Vietnamese stocks listed at the Ho Chi Minh City Stock Exchange (HOSE). Panel data regression techniques are used to examine relationships between capital structure decisions and firm performance for 1,580 firm-quarter observations of Vietnamese non-financial listed firms during 2007–2011. On the other hand, different from earlier studies, market-based and accounting-based firm performance variables are considered whereas short- and long-term capital structure decisions are discussed. Our results show that short-term capital structures decisions are found to be significantly negative associated with accounting-based firm performance but long-term capital structures decisions are positively related to market-based firm performance. Possible reasons are that Vietnamese firms mainly rely on debts financings, especially short-term debts. More than 32 percent of assets are financed with short-term debt while only 9 percent come from the long term debt. Next, we find a significant and positive relationship between firm size and firm performance while showing a negative effect of the ratio of tangible fixed assets to total assets on firm performance.
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Capital structure has a close relationship with firm performance (Tian and Zeitun, 2007). Variety of variables can be used to measure the firm performance which includes productivity, growth and profitability. All of these measurements are linked between each other. This financial measurement can be the tools to determine the financial strengths, financial weaknesses, financial opportunities and financial threats of a company. According to Tian and Zeitun (2007), by using accounting based and market measures, organization’s capital structure has a significant as well as negative impact towards the firm’s performance. Bistroval et al, (2011) found that there is negative significant relationship between level of debt and firm performance. Roden and Lewellen (1995) investigate the capital structure of 48 firms in US from year 1981 to 1990 and the result indicates that there is positive relationship between profitability and capital structure. Abor (2005) in his study found that there is positive relationship between capital structure and firm performance during the period 1998 to 2002 in the Ghanian firms.
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Investigation of the impact of financing decisions on performance efficiency of companies is limited to their impact on profitability indicators. The impact of capital structure on profitability indicators was studied by (Gleason et al,. 2000; Deesomsak, 2004; Abor, 2005; Huang & Song, 2004; Berger & Bonaccorsi, 2006; Tian & Zeitun, 2007; Rao et al., 2007; Akintoye, 2008; Nimalathasan & Valeriu, 2010; Onaolapo & Kajola, 2010; San & Heng, 2011). Only few studies in this research area were carried out in Baltic countries. Norvaisiene et al., (2008) analyzed the impact of debt capital on investment and growth in the companies of Baltic countries. Bistrova et al., (2011) analyzed the impact of capital structure on return on equity and return on assets in the Baltic countries; however the results of this research are incorrect, because interrelated and interdependent variables were used as the regressors during the regression analysis. Norvaisiene & Stankeviciene (2012) investigated the impact of funding decisions on profitability indicators of Lithuanian food and beverage companies.
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Cost agency theory and Jensen and Meckling (1976) and the free-cash-flow theory proposed by Jensen (1986) define capital structure directly related to performance of an organization. Classical Modigliani- Miller theorem (1958) state the fact debt to equity ratio. In Arrow-Debreu environment debt suggest more debt in capital structure. Research describe two benefit of debt capital structure first is only interest payable not tax payable it’s enhance the width of firm .second one is cash flow freely there are not restriction cash reserve and pay dividend. But in other side some managers prefer to equity on capital structure due to that there are not pay fixed amount of interest. And equity is necessary to attract debtor. When bank use portfolio in capital structures there less chance of spoilt. Cash flow theory cannot support debt attitude. More debt negative impacts on firm return on equity, operating profit margin, total productivity. (Iavorskyi, 2013).
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The choice between debt and equity financing has been directed to seek the optimal capital structure. Under the agency costs hypothesis, a high leverage or a low equity/asset ratio reduces the agency costs of outside equity and increases firm value. Several studies show that a firm with high leverage tends to have an optimal capital structure and therefore it leads to produce a good performance, while the Modigliani-Miller theorem proves that it has no effect on the value of firm. The importance of these issues has only motivated researchers to examine the presence of agency costs in the non-financial firms. In financial firms, agency costs may also be particularly large because banks are by their very nature informationally opaque – holding private information on their loan customers and other credit counterparties. In addition, regulators that set minimums for equity capital and other types of regulatory capital in order to deter excessive risk taking and perhaps affecting agency costs directly to change banks’ capital structure. In this paper we attempt to prove the agency cost hypothesis of Islamic Banks in Malaysia, under which high leverage firm tends to reduce agency costs. We set the profit efficiency of a bank as an indicator of reducing agency cost and the ratio equity of a bank as an indicator of leverage. Our findings are consistent with the agency hypothesis. The higher leverage or a lower equity capital ratio is associated with higher profit efficiency.
impact of capital structure on firm performance by analyzing the relationship between operating performance of Malaysian firms. Modigliani and Miller (1958) have theoretically argued and proved that capital structure is irrelevant in a perfect market condition, characterized by the capital market with no taxes, no transaction costs and homogenous expectations; other works that assume several market imperfections on the contrary suggested that capital structure decisions are relevant since it can affect shareholders wealth. Modigliani and Miller (1963) in existence of corporate taxes suggested that firms should use as much debt capital as possible in order to maximize their value by maximizing the interest tax shield. The dependent variables used in this research are ROA (Return on asset), ROE (return on equity) and control variable are firm size (SIZE), sales growth (SG), growth (AG), firm efficiency and independent variables are long-term debt (LTD), short term debt (STD) and total debt (TD). All the companies are public listed organizations in the Malaysia, specifically the Modigliani-Miller theorem; trade-off theory and pecking order theory were reviewed to provide sufficient understanding of how much capital structure could affect firm’s performance. This study covers tow major sectors consumers and industrials sectors 58 firm’s sample starting from 2005 to 2010 with total of 358 observations and two general pooled regression models are used . Findings of the study validated that STD and TD have significant relationship with return on asset (ROA) while Return on equity (ROE) and all capital structure indicators have significant relationship. The significant relationship between short-term debt, long-term debt and total debt with ROE is consistent with the findings of (Abor 2005; Mesquita and Lara 2003). The positive significant relationship between long-term debts with ROA is coherent with the findings of (Philips and Sipahioglu 2004; Grossman and Hart 1986). Which indicates that higher levels of debt in the firm’s capital structure is directly, associated with higher performance levels and other finding is that Return on Equity (ROE) is not significant associated with all the capital structure variables.