Measures Of Capital Structure Research Articles

Firm-specific and country-level determinants of commercial banks capital structures: evidence from Ethiopia

Since the seminal work of MM irrelevance theory, there has been a long history of controversy among academicians both in developed and developing nations regarding the determinants of capital structure. To this end, the main aim of this study was to investigate firm-specific and country-level determinants of the capital structure of Ethiopian commercial banks. The study adopted an explanatory research design with a quantitative research approach. A panel dataset was obtained from 14 commercial banks, which range from 2010 to 2022. A random effect panel regression result revealed that tangibility, non-debt tax shields, growth, and interest rate had a positive and significant effect, while the gross domestic product had a negative and significant effect on leverage which is used as a measure of capital structure. Among the independent variables tested, ROA, liquidity, effective tax rate, risk, and inflation have an insignificant effect on the capital structure of the selected commercial banks. The study will have implications for managers of commercial banks, legislators, regulators, and other interested parties that can use the study's conclusions to help them make well-informed capital decisions and implement the necessary measures to enhance the financial performance of Ethiopian banks with an optimal ratio of debt to equity.

Testing static and dynamic leverage models: A standardized leverage measure approach

This paper proposes and validates a new measure of capital structure by normalizing firms’ leverage ratios by their business risks, assuming asset values follow a geometric Brownian motion. We empirically test the new measure with both static and dynamic leverage models, and we find that the standardized leverage (SDL) ratio: 1) performs similarly to book leverage in static leverage regressions, and 2) presents a more realistic speed of adjustment (SOA) in dynamic leverage adjustment models. Within the framework of SDL, we also compute individual firms’ leverage adjustment speeds, which is shown to have significant predictive power regarding firms’ future capital structure adjustments. Overall, the empirical results suggest that the SDL exhibits strong candidacy to serve as a more reliable measure for firms’ real capital structure.

Examining the Impact of Capital Structure and Board Diversity on Firm Performance: Evidence from Pakistan Stock Exchange

This study aims to investigate the relationship between capital structure, board diversity, and firm performance among KSE-100 index firms listed on the Pakistan Stock Exchange. We use a panel data approach and STATA MP-14 to analyze the impact of two capital structure measures (debt-to-equity ratio and debt-to-total assets) and three board diversity measures (female representation, female executive presence, and male executive presence) on three financial performance indicators (firm size, firm age, and return on equity). Our findings reveal a significant positive association between debt financing and female board representation, as well as a positive relationship between capital structure and female executive presence. However, we find an insignificant and negative relationship between capital structure and managerial ownership. This study contributes to the existing literature on corporate governance and capital structure by highlighting the importance of board diversity in emerging markets. Future studies can build on our findings by exploring the relationship between capital structure and board diversity in other developing countries and comparing the results to identify potential variations.

EVALUATE THE IMPACT OF CAPITAL STRUCTURE MODELING ON THE PERFORMANCE OF PRODUCTION PROCESSES

The research aims to explore the impact of capital structure modeling on production business performance in order to arrive at a conclusion. Data were collected based on input from six Turkish cement producing companies. Analysis of the collected data was then used to achieve the goal. In the first part of the study, the concept of capital structure was explained, and the theories, namely the irrelevance theory, the trade-off theory (TOT), and their types, were discussed. The determinants of all capital structures and company-specific and capital structure models were also identified. The second part of the study was the practical part, where data on Turkish companies was used to achieve the goal. An input analysis of the capital structure of the selected sector was performed in order to generalize and clarify the conclusions regarding the capital structure of the analyzed companies. Where the main problem lies in determining the indicators of the capital structure that affect the performance of productive businesses. Performance was evaluated using economic value added (EVA) scale, correlation matrix, Cohen's scale, and SPSS. We have developed some capital structure measures to investigate the links between these indicators and the overall performance of the organization. Correlation research results have shown significant improvements using regression analysis and principal components analysis to study the impact of certain unrelated elements on the overall success of the company. As a result, we recommend developing a new option that is willing to bear the risks associated with both options. The results of this study will serve as the basis for further research, including the collection of more relevant data and a further set of analyses.

Capital Structure Determinants of Listed Private and State Companies

Purpose. The purpose of this paper is to determine and analyze the determinants of the capital structure of joint-stock companies in Bosnia and Herzegovina that are listed on the Banja Luka Stock Exchange. This study will answer the question as to which factors determine the capital structure of BiH companies and whether existing financial theories of the capital structure hold true in that context. The main research objective is to estimate the effects of a firm’s level determinants on its capital structure measures in different ownership structures. Those findings will certainly advance our understanding of listed companies financing behavior. Methodology. For the research, we took into account firm-specific characteristics and divided joint-stock companies into private and state-owned. The results of the research show that the capital structure of these two groups of enterprises is differently affected by individual determinants. Findings and implications. While state-owned enterprises rely more on borrowed resources to finance both short-term and long-term assets, private enterprises even finance part of their short-term assets with their own capital. However, the most important determinant in both groups of enterprises is the share of inventories in short-term assets, which confirms that short-term liabilities, i.e. free sources of financing in the form of liabilities to suppliers are the determinant that most positively affect the indebtedness of all enterprises. Unlike previous research that observed enterprises according to their size or affiliation to individual industries, the focus of our research is enterprises of different ownership structures. The empirical statistical results provide basis for logical conclusion and appropriate policy implications. The study points to the specifics of the capital structure in private and publicly listed joint-stock companies. The stated opposite influence of certain ratios on the indebtedness of the enterprises is explained by a number of factors. Limitations. This study focuses only on the presentation of the recent indicators of capital structure of listed companies - listed on the Banja Luka Stock Exchange, which is one of its major limitations. The limitation of this search is the sample size which can be considered low. Further research may be conducted by using other capital markets to explore more information regarding the effect of the variables affecting the capital structure. In addition, further research may also be conducted by using other proxies or by adding more variables, sample size, and research period to get a better result. Originality. The study is an original research paper. It has not been published in any other peer-reviewed journal not under consideration for publication by any other journal. The paper adds to the existing literature on Bosnia and Hezegovina by giving an overview of recent developments in the flexi purity concept, pointing out the areas that require policy response.

Executive characteristics as moderators: Exploring the impact of geopolitical risk on capital structure decisions

This study examines the relationship between geopolitical risk and firms’ capital structure decisions, focusing on the moderating effects of executive characteristics. Using US corporations data from 1992 to 2020, we find that firms adopt more conservative capital structure choices in response to higher exposure to geopolitical risk. Furthermore, we investigate how executives’ age and gender influence this relationship. Our findings indicate that firms with a higher proportion of female executives demonstrate heightened sensitivity to geopolitical risk, leading to more risk-averse financial decisions. In contrast, firms with older executives attenuate the adverse impact of geopolitical risk on financial leverage, suggesting a mitigating effect. The robustness of our results is confirmed through alternative measures of capital structure and estimation methods. We also identify risk aversion as a potential channel through which geopolitical risk affects capital structure choices and examine the role of executive characteristics in this channel using a moderated mediation model.

Effect of Capital Structure on Return on Assets of Kenya Tea Development Agency Tea Manufacturing Factories in Kericho and Bomet Counties, Kenya

Capital structure decision is the mix of debt and equity that a company uses to finance its business. This study aimed to investigate the effects of capital structure on KTDA tea processing factories' performance in Kericho and Bomet counties. This study was carried out because it was not clear how capital structure influences the financial performance of tea processing factories. Secondary data were used in the study where the performance measure of return on assets was used as the dependent variable and four capital structure measures (including short–term debt, long-term debt, total debt to total assets, and total debt to total equity) as an independent variable. The study sample was from all the nine tea factories in Region Five of KTDA that had been in operation for more than five years and hence the readiness of Annual Reports for the financial year 2008-2013. The study employed a panel fixed effect regression model to establish the effects of capital structure on the ROA for the tea processing factories. The results indicate that ROA is significantly and positively associated with long-term debt and total debt at 1% and 5%, respectively, while on the other hand, short-term debt shows a negative and significant relationship at 5%. The negative relation between short-term debt and the profitability of tea processing factories means that supplying finance through short-term debts does not lead to profitability. The study recommends that the tea processing factories must consider using an optimal capital structure since it will minimize the cost of capital and, hence, the cost of financing the tea processing operations.

CAPITAL STRUCTURE AND PROFITABILITY OF COMMERCIAL STATE-OWNED ENTERPRISES IN NAMIBIA

This study investigates the impact of capital structure on the performance of commercial stateowned enterprises (SOEs) in Namibia using panel data modelling techniques on data from 2011 to 2020. The research extends performance measures and leverage measures employed by previous studies, utilizing total liabilities to total assets (TLTA) and total equity to total assets (TETA) to examine the effects of debt structures on corporate finance. The study employs return on equity (ROE) and return on assets (ROA) as performance measures. The findings reveal no significant relationship between capital structure and profitability of commercial SOEs in Namibia, thus supporting the irrelevance theory. Additionally, a unidirectional causality is found between capital structure and profitability measures. The study's implications suggest that high debt levels should be reduced to optimize capital structure and that policies should be implemented to enhance SOE performance through innovation and best practices. The findings contribute to the ongoing debate on public sector reforms and provide a basis for further research in this area.

Covid-19 Pandemic and Capital Structure: Evidence from West Africa

The question of whether the Covid-19 pandemic is a predictor of firms’ capital structure has remained unanswered following limited empirical studies. The financial structure of every business is its lifeblood which is the most important decision-making at any stage of the business’s operation. This study investigated the effect of covid-19 on the capital structure of non-financial firms listed on the Ghana stock exchange (GSE). The study focused on long-term debt, short-term debt and total debt ratios as a measure of capital structure. The study adopted the ex-post facto research design, the population consisted of 23 listed non-financial firms out of which 21 were sampled. Data was sourced from audited annual financial reports of the selected companies. Panel regression and ANOVA were used to analyze the data. The findings of the study revealed that covid-19 pandemic showed an insignificant effect on capital structure measured as long-term debt. This implies that the pandemic did not cause significant volatility to the long-term debt of non-financial firms in Ghana within the period of the study. Furthermore, the covid-19 pandemic showed no significant effect on short-term debt. This indicates that short-term borrowings for non-financial firms listed on GSE were not significantly affected by the covid-19 pandemic. The findings of the study further revealed that the covid-19 pandemic does not have a significant effect on the total debt of listed non-financial companies in Ghana. The study recommends that the capital structure policy of non-financial firms listed on the Ghana Stock Exchange should be maintained. This is because the study revealed that the severity of the covid-19 pandemic on business operations did not significantly affect the capital structure of the firms as measured by long-term debt, short-term and total debt.

IMPACT OF CAPITAL STRUCTURE ON BANK PERFORMANCE: A STUDY ON JANATA BANK LIMITED OF BANGLADESH

This study aims to examine the impact of capital structure on the bank performance of Janata Bank Limited (JBL) from 2011 to 2021. Furthermore, the goal of this study is to determine the connection between debt combinations and financial performance. For analysis, secondary data are mainly used from the last 11 years (2011-2021) annual reports of Janata Bank Limited. In this study capital structure measures (long-term debt on equity, long-term debt on the asset, total debt on equity, total debt on the asset, short-term debt on equity, short-term debt asset) are selected as the independent variables, and performance measures (return on asset, return on equity, return on investment) were considered as the dependent variables. As statistical tools, regression and correlation analysis have been used in this study. The study's findings demonstrated a strong correlation between JBL's capital structure and financial performance.

Influence of Capital structure on Firm Performance: Empirical Evidence from Indian Manufacturing Industry

The study is an attempt to examine empirically the impact of capital structure on firm performance using a data sample of 56 Indian manufacturing firms listed on Bombay Stock Exchange, National Stock Exchange or both during 2010-2022. The study uses three financial performance measures namely return on assets, return on capital employed and earnings per share as dependent variables. The eight capital structure measures such as long-term debt, short-term debt, interest coverage ratio, current ratio, growth, tangibility, non debt tax shield and size are used as independent variables. The data are divided into three sectors including steel, cement and automobile. The correlation analysis and multiple regression analysis are used in the study to estimate the impact of capital structure on firm performance. The empirical result shows that firm performance has a negative relationship with short and long term debt in most of the studied sectors. In the automotive sector, long-term debt is positively related to return on capital employed. Liquidity is negatively related to firm performance in the cement and automotive industries. Non-debt tax shield is positively related to firm performance as measured by return on capital employed and earnings per share in the cement and automotive industries, respectively, while interest coverage ratio is positively correlated with firm performance in the cement industry.

Capital structure and earnings management: evidence from Pakistan

PurposeThe purpose of this study is to investigate whether capital structure affects accruals and real earnings management (AEM and REM) of nonfinancial firms listed on Pakistan Stock Exchange (PSX). Moreover, to investigate whether institutional development (ID) moderates the relation between capital structure and earnings management (EM).Design/methodology/approachData were taken from annual reports of nonfinancial firms listed on the PSX during 2012–2019. Data of 150 firms for a period of eight years were found completed with respect to the variables used in this study. The generalized moments of methods estimator is used to estimate the effects of explanatory variables on earning management. Furthermore, fixed and random effects methods were used to estimate the impact of capital structure on AEM and REM.FindingsResults show that all three measures of capital structure (i.e. total debt ratio, long-term debt ratio and short-term debt ratios) are inversely related to AEM. In contrast, all measures of capital structure are positively related to abnormal cash flow from operations. Total debt ratio and long-term debt ratio are negatively while short-term debt ratio is positively related to abnormal discretionary expenses. Total debt ratio and short-term debt ratio are significant and negatively related to abnormal production cost. Additionally, interaction terms of ID (i.e. rule of law and regulatory quality) significantly moderate the controlling role of debt on discretionary accruals. In sum, results show that the use of debt induces lender's monitoring. Consequently, managers move toward REM because of lower probability of being exposed.Practical implicationsFindings of this study have significant implications for managers and regulatory authorities. For instance, the use of debt increases the lender’s influence which restricts the managers to be involved in EM practices. Moreover, regulatory authorities are required to address the loopholes in regulations to refrain the managers to be engaged in EM.Originality/valueTo the best of the authors’ knowledge, this is the first study in Pakistan that has explored the impact of capital structure on AEM and REM. More importantly, a careful review of the literature affirms that this study is among the few studies that have used ID as a moderating variable to explain the relation between capital structure and EM.

The Effect of Capital Structure on the Performance of Marginal Oil Fields in Nigeria

Marginal fields are pivotal to wealth creation and indigenous participation in the oil and gas industry. Despite the potential role of marginal fields in economic growth, indigenous operators are confronted with financing fields development. This study examined the relationship between capital structure and performance of producing marginal oil fields in Nigeria. Ten fields operated by five companies were empirically investigated between 2011 and 2021. Firm’s performance indicators are accounting-based measurement namely, Return on Asset (ROA) and Return on Equity (ROE). Capital structure measures are equity, long term debt and short-term debt. Panel Corrected standard errors regression technique was employed to analyse time series cross sectional data. Findings indicate that there was a significant positive relationship between equity and performance of Marginal fields in Nigeria. These corroborate Pecking order theory that firms use retained earnings first, then debts. Long term debt and short-term debt show negative relationship with marginal field operators’ performance. This could be attributed to the high cost of borrowing in Nigeria and the unwillingness of local banks to grant loans without adequate collateral.

The effect of capital structure, operating efficiency and non-interest income on bank profitability: new evidence from Asia

PurposeThe Asian banking system has been appreciated with many distinct qualities including consistent in profitability. Many studies have examined the profitability of Asian banking sector from diverse perspectives. However, studies on bank profitability in connection to the capital structure, operating efficiency and non-interest income are only a few. This study investigates the influence of capital structure as estimated by leverage ratio and long-term debt, operating efficiency and non-interest income on the profitability of the banking industry in 28 countries of Asia.Design/methodology/approachThis paper utilizes fixed effect regression model by involving panel data with sample of 492 banks from 28 countries of Asia for the time span of 15 years from 2004 to 2018.FindingsThe results confirm that an increase in total debt ratio increases the profit margin of the bank as supported by the agency cost theory, suggesting that the debt financing increases the profitability of the firm. In addition, the findings reveal that lowering the operating expenses and managing of costs effectively can boost the profitability of bank. Furthermore, non-interest income plays a vital role when the interest rates are lower. Hence the study suggests that a careful investment in this sector can generate income as well as increase the profit margin of the banking arena.Originality/valueThe paper examines the profitability of bank by including impact of leverage ratio and long-term debt as a measure of capital structure along with the influence of operational efficiency and non-interest income which contributes to the understanding of the existing literature.

The Impact of Capital Structure and Ownership Structure on Financial Performance: A Study on the KSE 100 Listed Firms in the Pakistan Stock Exchange

Purpose: This research study aimed to examine the impact of capital structure and ownership structure on the financial performance of KSE-100 index firms on the Pakistan Stock Exchange.
 Design/Methodology/Approach: 100 listed companies have been selected as sample for the study but due to data limitations, 90 companies' annual data has been used for 2009-2018. Ordinary least square regression was used on the panel data for analysis. Two measures of capital structure (debt-to-equity ratio and debt to total assets) while three measures of ownership structure (Foreign ownership, Institutional ownership, and managerial ownership) have been used to determine their impact on three financial performance measures (return on assets, return on equity, and Tobin's).
 Findings: The results of this study showed that there is a significant negative relationship between financial performance and capital structure. Ownership structure and firm financial performance showed a significant positive relationship when measured on the basis of foreign ownership and institutional ownership while insignificant and negatively related to managerial ownership.
 Implications: This study suggests that organizations should take financing decisions in accordance with optimum capital structure because more debt decreases financial performance. Furthermore, a decision should be taken the encouragement of foreign and institutional shareholding, while the level of managerial ownership should be lessened to enhance financial performance

The Impact of Capital Structure and Firm Size on Financial Performance of Commercial Banks in Nepal

This paper aimed to examine the impact of capital structure and firm size on financial performance of Nepalese commercial banks. The study used a sample of 14 commercial banks covering government owned, joint venture and private banks over the period 2013/2014– 2018/2019 with secondary sources of data. Regression analysis was used in the estimation of functions relating the Return on Assets (ROA) and Earnings per Share (EPS) with measures of capital structure and firm size (total assets). The results revealed a negative relation of ROA and EPS with capital structure (Debt/Equity). However, it showed a positive relationship of ROA and EPS with size (total assets). The findings provided the evidence in support of high-level equity capital employed in the capital structure of Nepalese commercial banks.

Corporate Taxation and Firm-Specific Determinants of Capital Structure: Evidence from the UK and US Multinational Firms

This paper aims to examine whether effective tax rate and firm-specific factors (such as firm size, growth opportunities, tangibility, risk, profitability, non-debt tax shields and liquidity) impact the capital structure of multinational firms in the energy sector. We employ regression models consisting of OLS, fixed effect and random effect to test balanced panel dataset of multinational firms based in the UK and USA over the period 2011–2019. We show a positive and significant effect of tangibility, risk, profitability and non-debt tax shields on long-term and total debt measures of capital structure. In the case of short-term debt, however, we reveal that it is significantly negatively related to tangibility, non-debt tax shields and liquidity, and positively associated with firm risk. Moreover, we report that the effective tax rate and firm size are insignificantly negatively related to the leverage choices of multinational firms, and liquidity has a significant inverse relationship with long-term debt and total debt. This study reveals mixed support for the prevailing capital structure theories and evidence that multinational firms are unequivocally responsive to the capital structure. The results significantly contribute to evaluating multinational firms in the energy sector and show how managers can achieve an optimal level of capital structure.

Capital Structure and Firm Performance: Evidence from Malaysian Public Listed Plantation Companies

This paper examines the relationship between capital structure and performance of firms. The study is confined to plantation sector companies in Malaysia and is based on a sample of 39 firms which listed in Bursa Malaysia for the period from 2009 to 2019. This study uses two performance measures which are ROA and ROE as the dependent variable. Besides, the capital structure measures are the short-term debt, long-term debt, total debt and firm growth, which as the independent variables. Size will be the control variable in this study. Moreover, a fixed-effect panel regression analysis has been used to analyse the impact of capital structure on firm performance. The results indicate that firm performance, which is in term of ROA, have an insignificant relationship with short-term debt (STD) and long-term debt (LTD). For the total debt (TD) and growth, there is a significant relationship with ROA. However, for the performance measured by ROE, it has an insignificant relationship with short-term debt (STD), long-term debt (LTD) and total debt (TD). Furthermore, there is a significant relationship between the growth and the performance firms from plantation sector in Malaysia.

Nexus between Capital Structure and Financial Performance of Nepalese Hydropower Companies

This study aims to shed light on the empirical investigation of the nexus between capital structure and financial performance. This paper focuses on hydropower companies listed on Nepal Stock Exchange (NEPSE) until mid-July 2020. This paper analyzes the nexus of capital structure with the financial performance of hydropower companies for the period 2005/06 to 2019/20. This study applies a descriptive and causal research design. Return on equity (ROE) is used to measure financial performance and is considered a dependent variable and short-term debt to capital (SDC), long-term debt to capital (LDC), total debt to capital (TDC), and debt to assets (DR) ratios are the measures of capital structure and used as explanatory variables. This paper reveals that short-term debt to capital ratio has a positive role in financial performance. Moreover, the findings of this paper depict that long-term debt to capital and total debt to capital has a significant positive impact on the financial performance of hydropower companies in Nepal. However, the debt to asset ratio inversely affects financial performance. Thus, this paper concludes that Nepalese hydropower companies should increase short-term, long-term, and total debt to capital ratios and decrease debt to assets to maximize financial performance. The implication of this study is in the formulation of optimal capital structure policy. The hydropower sector can apply the findings of this paper to formulate an appropriate capital structure policy to maximize its financial performance in Nepal.

Effect of Capital Structure on Firms Performance in Nigeria

The lack of precise methodology to determine the capital structure mix on firm performance has generated a lot of mixed results. Empirical studies from emerging nations revealed a scarcity of empirical findings on the measures with a significant impact on firm performance. This paper examines capital structure measures on manufacturing firm’s performance in Nigeria. Using annualized panel data for a sample of 15 quoted firms from diverse sectoral classifications from 1999-2018. Excluding the financial firms due to the uniqueness of their capital structure and the strict legal requirements for their financing choices. This study focus on non-financial firms. Capital structure measures book value and market value of the firm. Results indicate that performance proxy by ROE, and Tobin’s Q, significantly influence SDTA, SIZE, LDTA, and TDTA while ROA negatively influences LDTA, D_E, and TDTA. Findings revealed a robust relationship between Tobin’s Q and financial performance compared to other book value. Tobin’s Q is a better measure of performance within the period under review. The study reveals that Nigerian firms are keenly financed by short‐term debt supporting the Pecking Order Theory. It’s vital to note that no single theory can sufficiently explain the capital structure effect on firm performance.