Impact of Operational Efficiency and Financial Performance on Capital Structure using Earnings Management as a Moderator Variable

Abstract

This research aims to investigate the association between operational efficiency and financial performance of the company on capital structure which is indicated in terms of the relative balance of the company financing sources using the earning management as a moderator variable in the process of management decision making regarding the enhancing the balance of the firm capital structure. We use a sample of 65 listed non-financial companies in the Egyptian Stock Exchange (EGX) during the 7 years (2013-2019). Three panel models for estimating the three multiple linear panel regression equations used in this research to test the impact of operational efficiency, ROA, ROE, gross profit margin, current ratio, asset turnover, inventory turnover, Tobin’s Q ratio and firm size on capital structure using the earnings management as a moderator variable. Findings indicate that ROE, gross profit margin and firm size have a positive significant impact on company’ capital structure, while operational efficiency, ROA, Tobin’s Q ratio and all liquidity ratios used in the first regression model (current ratio, asset turnover and inventory turnover) have a significant negative relationship with capital structure. Moreover, findings indicate that the firm’ operational efficiency, gross profit margin and Tobin’s Q ratio have a positive significant impact on company’ earnings management, while ROA, ROE and all liquidity ratios used in the second regression model (current ratio, asset turnover and inventory turnover) have a significant negative relationship with earnings management. Finally, the statistical results shows that all the variables used in the third regression model namely, earnings management, Tobin’s Q ratio and firm size have a significant negative relationship with the capital structure of the firm.