Further, as the third column shows, bonds and bank debt are both used by the majority of firms in the sample. The relationship between capital structure and profitability. The study examined the effect of capital structure on financial performance of deposit money banks in nigeria. Although corporate net issuing activity is lively and although it can explain 60 percent of debt ratio dynamics long. Modigliani and miller, in a seminal contribution made in 1958, forcefully advanced the proposition that the cost of capital of a firm is independent of its cs9. The investigation has been performed using panel data procedure for a sample of 237 malaysian listed companies on the bursa malaysia stock exchange during 19952011. Information about the openaccess article study the problems of optimizing the capital structure of the company in doaj. This article examines the international determinants of capital structure using a large sample of firms from 37 countries. The journal of online education, new york, january 2009. The theory of capital structure harris 1991 the journal. Abstract capital structure decisions are among the most important and crucial decisions for any business because of their effect on the performance of firms. A multiple regression analysis of pooledcross sectional and timeseries observations have been employed in the analysis. Explaining analysis of the relationship between capital structure. Aswath damodaran 3 the objective in decision making n in traditional corporate finance, the objective in decision making is to maximize the value of the firm.
Tradeoff theory, pecking order theory and market timing theory wan shahdila shah shahar1, wan shahzlinda shah shahar2, nor fadilah bahari3. Reason why capital structure is important hello peer employee, as indicated by kenton, the capital structure is how a firm funds its general tasks and development by utilizing various wellsprings of assets. The objective of this paper is to examine whether capital requirements are indeed a firstorder determinant of banks capital structure using the crosssection and timeseries variation in our sample of large, publicly traded banks spanning 16 countries the united states and the eu15 from 1991 until 2004. Because the relationship between liquidity and capital structure is not well. Article information, pdf download for the effect of capital structure on profitability. This paper develops a model of financing that jointly determines a firms capital structure, its voluntary disclosure policy, and its cost of capital. Since the publication of the seminal article of modigliani and miller, a vast. However, empirical evidence on the determinants of firms capital structure is still.
The impact of capital structure on risk and firm performance. Influence of capital structure on firm performance. Capital structure is essentially concerned with how the firm decides to divide its cash flows into two broad components, a fixed component that is earmarked to meet the obligations toward debt capital and a residual component that belongs to equity shareholdersp. The impact of capital structure on financial performance of commercial banks in ethiopia by mathewos woldemariam birru jimma university. American journal of industrial and business management vol. The study of capital structure attempts to explain how listed firms utilise the mix of various forms of securities in order to finance investment. There are two broad views on the impact of capital structure on the performance of firms, while one asserts the significance of capital structure in determining firms. The capital structure puzzle is unravelled and a clear. The combination of debt and equity used to finance a companys projects is referred to as capital structure. Pdf determinants of capital structure and impact capital. Confounding the analysis is the fact that the financial crisis created a recession which, by itself, would be expected to affect firm capital structure.
Capital structure and financial performance of listed. In harris and raviv, the assertion of control by investors through bankruptcy entails costs related to the production of information, used in the liquidation decision, about the firms prospects. Analysis on the factors affecting the capital structure of small and mediumsized enterprises in china. The previous results establish that both book leverage and market leverage decline with increases in import competition. International samanm journal of finance and accounting. Pdf the present study is aimed to investigate the determinants of capital structure of iranian. The objective of a firm should therefore be directed towards the maximization of its value by examining its capital structure or financial leverage decision from the. Panel data for the selected firms were generated and analyzed using ordinary least squares ols as a method of estimation. Therefore, there have been many studies inspecting the rapport of capital structure with the performance of firms, although the findings of these studies are inconclusive. The capital structure decision can affect the value of the firm either by changing the expected earnings or the cost of capital or both. Capital structure that maximizes the value of company or stock prices is the best capital structure husnan and pudjiastuti, 1994.
The purpose of this paper is to study the status of studies on capital structure determinants in the past 40 years. The choice of suitable source of fund for capital structure is one of the major policy decisions taken by a firm. Much of the research since the seminal work of modigliani and miller 1958 has focused on testing the implications of two traditional views of capital structure. It is important not only from a return maximization point of view, but also this decision has a great impact on a firms ability to. The data has been analyzed by using descriptive statistics, correlation and multiple panel data regression models. Thus, the present study has been undertaken to evaluate the effect of capital structure on the profitability of nifty 50 companies listed on national stock exchange of india from 2008 2017. This section examines how capital structure adjustments occur when import competition changes. The theory provides insight into a firms capital structure decision in a capital market free of taxes, transaction costs, and other frictions. Capital structure, cost of capital, and voluntary disclosures. The impact of capital structure on the performance of. Finally, since capital structure is used as an antitakeover device deangelo and deangelo 1985, dann and deangelo 1988, and amihud, et al. Capital structure optimization is a key aspect to ensure the success of infrastructure financing.
The result further revealed that firm growth and firm size affects financial distress negatively. This paper is based on the following research framework. Introduction capital is a critical resource for all firms, the supply of which is uncertain. Available formats pdf please select a format to send. Modern capital structure theory begins with the irrelevance theory of. Myers he study of capital structure attempts to explain the mix of securities and financing sources used by corporations to finance real investment. Capital structure is still a puzzle among finance scholars. This is an open access article under the cc byncnd. Taxes and capital structure journal of financial and. The impact of capital structure on financial performance. An overview kennedy prince modugu department of accounting faculty of management sciences university of benin nigeria abstract capital structure decision poses a lot of challenges to firms. Taxes, capital structure choices, and equity value volume 53 issue 3 mara faccio, jin xu skip to main content accessibility help we use cookies to distinguish you from other users and to provide you with a better experience on our websites. Here the data is described, measures of institute of economic studies, charles university, prague and idet, department of eco. The outcome of the research reveals that capital structure affects corporate financial distress negatively while company age from listing years, profitability and asset tangibility affects corporate financial distress positively.
International research journal of applied and basic sciences. Unpublished dissertation chapter, university of illinois at urbanachampaign 2001. Evidence from malaysian listed companies mahfuzah salim, dr. Capital structure is proxy by total debt ratio and is calculated as total debt divided by total assets capital structure is proxy by total debt ratio and is calculated as total debt divided by total assets abor, 2005. Capital structure denotes means an establishment funds its operations using some blend of equity plus debt tsai, 2010. It is the permanent financing of the company represented primarily by shareholder. Firm size, capital structure, pecking order theory, tradeoff theory. In section 2 the potential determinants of capital structure are summarized and theoretical and empirical evidence concerning these determinants is provided. Us 29 global journal of management and business research volume xvi issue iv version i y ear 201 c abstractthis paper develops a study on identifying the most significant determinants of capital structure of 15 firms listed. This paper examines the impact of capital structure on financial performance of nigerian firms using a sample of thirty nonfinancial firms listed on the nigerian stock exchange during the seven year period, 2004 2010. Capital structure list of high impact articles ppts. In addition, there is a relative deficiency of empirical studies examining the link between capital structure and the performance of banks.
Bonds make up 19% of capital structure, and bank debt makes up % of capital structure. A study on capital structure pattern of small and medium. Capital structure chapter 15 and chapter 16 contents i. The relationship between capital structure and profitability cannot be ignored because the improvement in the profitability is necessary for the longterm survivability of the firm. Capital structure and stock returns journal of political. Capital structure articles scientific research publishing.
Determining an appropriate mix of equity and debt is one of the most strategic decisions public interest entities are confronted. Determinants of capital structure and impact capital structure on firm value. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. The textile industry starting from yarn manufacturing industry spinning, cloth. Debt comes in the form of bond issues or longterm notes. Article pdf available february 2018 with 3,538 reads. They concluded that the capital structure of the firms has a. In addition, capital structure may vary across time e. Researchers have argued that if organizational theory is to be relevant to practitioners, emphasis should be placed on organizational effectiveness and its influencing factors 3640. Obligation comes as bond issues or long haul notes payable, while value is delegated. Abdul ghafoor awan dean, faculty of management and social sciences, institute of southern punjab, multanpakistan. This paper investigates the impact of capital structure on profitability of the manufacturing companies in india and attempts to establish the hypothesized relationship as to how far the capital structure variables affect the business revenue of companies and what the interrelationship is between capital structure variable and profitability. Chapter iii concepts and theories of capital structure and profitability.
The purpose of this paper is to examine the impact of capital structure on the performance of microfinance institutions. Ii, issue 2,april 2011 171 capital structure and financial performance. Most of the research on capital structure has focused on the proportions of debt. Factors that determine the capital structure among micro. The vast majority of previous empirical works analyses the capital structure of firms in economies with highly developed stock markets. The goal of this chapter is to discuss the various theories that help to explain the determination of capital structure. Interest in capital structure optimization in infrastructure projects has been growing rapidly because of the prevalence of publicprivate partnerships in the u. A sample size of 422 listed indian manufacturing companies on bombay stock exchange bse has been taken to analyze the. Debt comes in the form of bond issues or longterm notes payable, while equity is classified as common stock, preferred stock or retained earnings.
The objective of the firm should be directed towards the maximization of the value of the firm the capital structure, or average, decision should be examined from the point of view of its impact on the value of the firm. It was observed that capital structure has direct impact on financial performance ofdeposit money banks dmbs. Determinants of capital structure of textile sector of pakistan independent variables. The capital structure decision plays an important role in the performance of a firm.
European journal of accounting auditing and finance research vol. Factors affecting the capital structure of a company. Investors who receive securities in return for supplying capital sometimes incur losses when they trade their securities with an informed trader. The earlier studies on capital structure mainly focuses on the analysis of certain firm characteristics e. Capital structure and cost of capital email memo 2 to. The paper investigates the relationship between capital structure and firm performance. Published in volume 15, issue 2, pages 81102 of journal of economic perspectives, spring 2001. It is the employment of an asset source of finance for which. Most of the research on capital structure has focused on the proportions of debt vs. The reliable determinants for leverage are firm size, tangibility, industry leverage, profits, and inflation.
Capital structure and debt structure journals oxford academic. International journal of economics and financial issues. Effect of large tariff reductions on capital structure adjustments. This paper highlights the major gaps in the literature on determinants of capital structure and also aims to raise specific questions for future research. Because interest payment on debt is tax deductible, the addition of debt in the capital structure will improve the profitability of the firm.
This investigation has beenperformed on a sample of 36 bangladeshi firms listed in dhaka stock exchange during the period 20072012. Abstract this paper mainly studies the influence of capital structure on firms performance. Consequently, the market value of its shares may be affected by the capital structure decision. Factors affecting the capital structure iosr journals. Determinants of capital structure an empirical evidence, us.
Journal of economic perspectivesvolume 15, number 2spring 2001pages 811 02 capital structure stewart c. Nirajini and priya 20 define it as the technique an establishment applies for financing based on a blend of longterm capital ordinary and preference shares, debentures, loans, loan stock, etc. Capital structure, a reading prepared by pamela peterson drake 4. Bank debt is almost evenly divided between term debt and drawdowns on revolvingcredit facilities. In section 1 the most prominent theoretical and empirical findings are surveyed. This study adds to existing literatures to verify the claim of traditional theory of capital structure. Theories of capital structure explained with examples. Taxes and capital structure volume 50 issue 3 mara faccio, jin xu. The impact of capital structure on firms performance in.
Capital structure is determined by trading off these benefits of debt against costs of debt. Capital structure is the part of financial investment, which represents long term sources. Proceeding of the 2nd international conference on management and muamalah 2015 2nd icomm 16th 17th november 2015, eisbn. Capital structure, a reading prepared by pamela peterson drake 1. Emerging markets queries in finance and business the impact of capital structure on financial performance in romanian listed companies sorana. Capital structure choice is an important decision for a firm. This paper studies the impact of capital structure or financial leverage on firm financial performance. Factors affecting the capital structure the dependent variable are. A sample size of 422 listed indian manufacturing companies on bombay stock exchange bse has. Taxes, capital structure choices, and equity value journal.
784 487 546 1066 1487 869 304 1602 1021 528 806 515 209 1350 1260 583 653 632 204 44 1018 162 257 1422 1526 1528 148 922 1083 254 655 282 795 978 539 470 797 380 542 176