Capital Structure and Firm Performance: How Does Marketing Expense Interact?

Abstract

Focus of the study is to examine the role of marketing expense in the relation between capital structure and firm performance using 35 public limited companies listed in Colombo Stock Exchange (CSE), Sri Lanka for the period 2012 to 2019. Inconclusive evidence reported on the role of marketing expense along with unavailability of sound literature raise the need of a study in this nature. The study employs total debt to total asset ratio to represent the leverage of a company while return on assets as proxy for firm performance. Further, return on equity has been introduced to test the robustness of each model developed within the study. Followed by a general descriptive analysis, panel data regression models have been designed to observe the mediator or moderator role of marketing expenditure in determining the relationship between the main variables of the study. Moreover, the study has taken a fair attempt to eliminate model specification bias by incorporating control variables to the main regression models. As per the regression model outputs it was observed that marketing expense operates as a moderator variable in Sri Lanka and most importantly it is weakening the adverse impact created by excessive debt level on firm performance. These findings appeal for a developed capital market in Sri Lanka and highlight the radical decision making under resource-based view. The results of the study agree with the related literature in other parts of the world.