Impact of Capital Structure on Firm's Financial Performance: Evidence from United Kingdom

Abstract

The purpose of this paper is to examine empirically the impact of capital structure on financial performance of United Kingdom (UK) firms' during the period from 2006 to 2015. The investigation is performed using data of 739 UK very large and large listed companies on London Stock Exchange. The study uses four performance measures, including return on equity - ROE, return on assets - ROA, Tobin's Q and earnings per share EPS as dependent variables. The two capital structure ratios, namely long-term liabilities and short-term liabilities as well as growth rate of total assets are applied as independent variables. Size is a control variable. The results indicate that firms' financial performance, which is measured by ROA, ROE and Tobin's Q have negative relationship with long-term liabilities in most of studied sectors, whereas short-term debts has no significant impact on these ratios. The performance which is measured by EPS also has no relationship with firm's leverage. These findings are consistent for ROA, ROE and EPS when we consider all firms, not distinguish their line of business. The only change belongs to Tobin's Q when we observe a positive relationship. Besides that, size and growth factor also bring benefit for firms' performance, except Tobin's Q. Finally, the global financial crisis seem does not affect much on the relationship between leverage and profitability indicators.