Abstract
The purpose of this paper is to investigate the impact of capital structure decisions on the performance of the firm. The investigation has been performed using a data of 62 listed non-financial Egyptian firms over a period of fourteen years from 2003-2016. This study used two measures for performance the dependent variable which are ROA and ROE, the most common used measures agreed upon on the majority of previous studies. Whereas, for the independent variable “the capital structure, the study uses the three measures of capital structure which are total debt to total assets (TD), total short-term debt to total assets (STD), and total long-term debt to total assets (LTD). The results showed when using ROA as a measure of performance, a significant negative impact of capital structure (TD, STD, and LTD) exists; while in case of using ROE as a measure of performance, there’s a significant negative impact of capital structure only when using STD, otherwise a positive significant impact of capital structure exist.
Highlights
Capital structure decisions are one of the most crucial decisions in the field of finance
This study investigates the effect of the decision of capital structure on the firm’s performance of listed Egyptian non-financial firms
The study uses three measures for capital structure which are total debt to total assets (TD), total short-term debt to total assets (STD), and total long-term debt to total assets (LTD); and for the firm performance two measures are used the return on assets (ROA) defined as the total net income to total assets, and the return on equity (ROE) defined as the total net income to total equity
Summary
Capital structure decisions are one of the most crucial decisions in the field of finance. The capital structure literature as well as it determinants was originally founded by Modigliani and Miller (1985) presenting the irrelevancy theory; proposing the assumption of the existence of perfect markets where a tax-free economy with no transaction costs, no bankruptcy costs, using either debt or equity in financing the firm’s project will be the same with regards to the firm value; suggesting that the firm value depends upon profitability and risks rather that debt equity proportion. Jensen and Meckling (1976) presented the agency cost theory; the theory suggests that since the agency problem derived from the information asymmetry existed in some cases, firms tend to prefer the use of debt financing over equity financing This theory argues that the debt represents a fixed obligation that the firm must meet, through payment of debt interest and principals. Such obligations are assumed restrict any act by managers that may result in over consuming the firm’s financial resources, by taking over the free cash flow of the firm if exists
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