Abstract
This study aims to investigate the relationship between capital structure and profitability of food industry from an agro-based emerging economy perspective. To attain the objective, we have compiled panel data food and allied companies, representing 64% of total population, listed in Dhaka Stock Exchange and administered ordinary least square (OLS), fixed effect model (FEM), and random effect model (REM) estimate to test the impact of capital structure on the profitability of listed food companies in Bangladesh. The current study usage three proxy variables as the measure of profitability, viz., return on assets (ROA), return on equity (ROE), and earnings per share (EPS). Our panel data estimation using EViews 10 demonstrates that short term leverage has a significant negative impact on ROA (OLS model) and a strong positive impact on ROE (REM estimation) of the listed food and allied firms. However, the study do not produce any significant effects of long term debt on the firm profitability. The findings of the current study help develop the understanding of the corporate managers, investors, policy makers, and academics about the relationship between optimum financing mix and financial performance of food industries and provides valuable insights from an agro-based emerging economy perspective.
Highlights
DATA AND METHODOLOGY Data and Variables Based on the availability of data, a sample of nine companies among the fourteen food & allied companies listed in the Dhaka Stock Exchange (DSE) has been selected to collect and compile the panel data over the period of 2015-2019 where the sample size represents 64% of the total population
The current study runs pooled ordinary least square (OLS), random effect model (REM), and fixed effect model (FEM) estimate to test the panel data obtained from the annual reports of the food and allied companies listed in the DSE
Table 2 shows a maximum value of Long-term debt ratio (LTD) ratio is 0.298 and a minimum value of 0.00 which means some companies do not go for any longterm debt financing
Summary
Financing decision has always been considered the most crucial managerial task for robust and sustainable business growth. It is assumed that an optimum mix of debt and equity financing may enhance the financial performance of companies by reducing the cost of capital and providing tax shield benefits to the firms (Kraus & Litzenberger, 1973; Miller, 1977). Since the first capital structure assumption was proposed by Modigliani and Miller (1958), many studies have been undertaken to investigate various aspects of capital structure choice and the effects of capital structure on corporate financial performance (Kraus & Litzenberger, 1973; Jensen & Meckilng, 1976; Myers & Majluf, 1984; Ngatno, Apriatni & Youlianto, 2021; Abdullah & Tursoy, 2021). Numbers of studies have been carried out to investigate the relationship between capital structure and firm performance from different perspectives (Chaganti & Damanpour, 1991; Berger & Di Patti, 2006; Margaritis & Psillaki, 2010; Abdullah & Tursoy, 2021; Ahmed & Bhuiyan, 2020) and documented different outcomes. Niskanen (2019) found a negative association between the capital structure and firm performance. Besides these two outcome dimensions, Ebaid (2009) found no significant association between capital structure and firm performance from the Egyptian company setting
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