Profitability and optimal debt ratio of the automobiles and parts sector in the Euro area

Charalampos Basdekis,Apostolos Christopoulos,Alexandros Lyras,Ioannis Katsampoxakis

doi:10.1108/jcms-08-2020-0031

Abstract

PurposeThe goal of this paper is twofold: to assess the influence of specific corporate and market features on automobiles and parts sector's profitability in Euro area and to identify this particular sector's optimum debt level.Design/methodology/approachFor the paper's purposes, the authors applied a panel data analysis on an annual basis for the period 2005–2017.FindingsThere is a strong statistical significance of debt ratio, growth domestic product per capita growth, E.C.'s economic sentiment index (ESI), the European Central Bank key interest rate and the Euro area crisis on sector's profitability, while weak statistical significance appears to emerge for the firm's size. Moreover, the authors find average 14.4% profitability for the entire sector of the Euro area, without significant fluctuations among firms and/or during the examined time period. Another interesting finding of this study is that results are consistent with the theory of Modigliani Miller that financial leverage at a “low” level is beneficial for the firm, but beyond a turning point, it becomes counterproductive. This turning point for the automobiles and parts sector in Euro area has been computed at 47.3%.Originality/valueThe paper focuses on issues of profitability, capital structure and optimal debt ratio of an important sector of the economy, the automotive sector. As regards the Euro area automotive sector, it is a dynamic sector with a significant multiplier effect for the European economy as it is strongly correlated with other industrial sectors as chemicals, steel, textiles, information technology and so forth, having an outstanding multiplier effect on the economy.

Highlights

Firms’ profitability and the factors that affect it are of major importance for all actors of an economic system, while its study has become even more crucial during the recent economic crisis
ROE is applied as a measure of profitability, while the independent variables include firm’s size, accruals, the Eurozone’s Economic Sentiment Indicator, growth domestic product (GDP) growth rate per capita and the European Central Bank (ECB) key interest rate, a dummy variable for the crisis, as well as the debt ratio and its square
As regards the Euro area automotive sector, it is a dynamic sector with a significant multiplier effect for the European economy as it is strongly correlated with other industrial sectors as chemicals, energy, steel, textiles, information technology and so forth, having an outstanding multiplier effect on the economy

Summary

Introduction

Firms’ profitability and the factors that affect it are of major importance for all actors of an economic system, while its study has become even more crucial during the recent economic crisis. As regards the Euro area automotive sector, it is a dynamic sector with a significant multiplier effect for the European economy as it is strongly correlated with other industrial sectors as chemicals, energy, steel, textiles, information technology and so forth, having an outstanding multiplier effect on the economy. In favor of this argument, the German chancellor intervened a few years ago to save OPEL, highlighting its importance for the economy and the need for a successful outcome in the rescue process. It is an industry the products of which are being characterized by price elasticity, and so far it is estimated to be affected by a continuous economic crisis

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