Capital Structure and Firm Performance of Listed Non-Financial Companies in Bangladesh

Abstract

This study investigates the firm performance on capital structure for the listed non-financial companies in Dhaka Stock Exchange (DSE) for the period of 2008-2011 under judgment sampling method. Specific objective of this research is to examine the relationship between the attribute of capital structure and the performance as measured by Return On Assets (ROA) and Return On Sales (ROS). Multiple regression models were used to estimate the influence of capital structure on firm performance and capital structure was measured by the debt ratio, debt to equity ratio, current debt ratio, proprietary of equity ratio and current assets proprietors' funds Ratio. The results obtained from regression models show that Debt Ratio, Debt Equity Ratio and Proprietary of Equity Ratio are negatively and significant relationship with Return On Asset (ROA) and Return On Sales (ROS). Beside the control variable total asset is positively and significant relationship with Return On Asset (ROA) and Return On Sales (ROS).Key words: Capital structure, firm performance, DSE, non-financial companies INTRODUCTIONCapital structure refers to the mix of long-term sources of funds, such as debentures, long-term debt, preference share capital and equity share capital including retained earnings. Capital structure is one of the most complex areas of financial decision making because of its interrelationship with other financial decision variables. Poor capital structure decisions can result in a high cost of capital, thereby, lowering the net present value of projects and making more of them unacceptable. Effective capital structure decisions can lower the cost of capital, resulting in higher net present value and more projects that are acceptable and thereby, increasing the value of the firm.The study examines, what is the effect of capital structure on firms performance and in particular debt? To answer of this question, it will discuss some scenarios, which relate with the nature of the impact of capital structure on firms performance. First situation involves positive relation between capital structure and firm performance, which indicates when the firms depend on debt as much as firms needs, it will lead to enhance their performance. It can explain that when the financial manager depends on debt as financing source more than owner equity (Sayeed, 2011). Financial manager prefers debt source more than equity refers to two reasons: the cost of debt is less than equity cost and the tax advantage of debt, which would therefore, maximize the firm performance (Soumadi and Hayajneh, 2013;Arbabiyan and Safari, 2009).Second situation designate, that there is an inverse correlation between capital structure and firm performance (Alom, 2013). Whenever, the firm depends on debt without employing it into profitable investments. Thus, the cost of debt will exceed the return that firm will obtain it. Consequently, it will lead to increase the bankruptcy risks which effect inversely on firm performance.

The determinants of capital structure in coal mining industry on the Indonesia Stock Exchange

“…Hermuningsih (2013) found that a company manager could choose using debt ratios to increase the company's value. Meanwhile, the Modigliani-Miller model suggests that companies will be able to increase their value by using debt, and one of the reasons is the taxa- http://dx.doi.org/10.21511/imfi.17 (1).2020. 15 tion aspect (Margaretha & Rizki, 2010).…”

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“…The authors concluded that longterm debts are likely to impose heavy terms and conditions and costly to finance in Bangladesh. The negative relationship between firm performance and leverage ratios is also recorded in the study of Rouf (2015). Another empirical study in Bangladesh done by Meah (2019) found that larger corporate boards, larger audit committees, and foreign investors reduce the flow of debt in firms and make firms less risky.…”

“…Where, β, Ȥ, λ represent the intercepts of the equations; ε is the random error term; i represents the firms and t represents the periods, 2013, 2014, 2015, 2016and 2017 Table 3 documents the summary of the variables used in this paper: Table 4 represents the descriptive statistics of mean, minimum and maximum values of dependent variable ROA for family and non-family firms and the amount of data are 390 firm-years for a period of 2013 to 2017 in a row. It is shown in the table that the average ROAs for family firms and non-family firms in Bangladesh are 10.91 percent and 9.82 percent respectively.…”

Bankruptcy Risk and Financial Performance of Companies Listed on the Stock Exchange of Thailand

“…Consequently, a company increases its profitability and enjoys higher turnover (Ramli, Latan, & Solovida, 2019;Rub, 2012). A negative impact of debt-to-equity ratio on financial performance occurs when the company borrows funds at a high interest rate, resulting in financing costs that are more than the company's profits (Rouf, 2015;Pratheepkanth, 2011).…”

“…Moreover, larger companies are likely to receive higher credit limits and longer credit periods than smaller companies, which result in lower business costs and higher profits, which means better turnover. Consequently, the size of a firm has a significant positive impact on financial performance (Eljelly, 2004;Bibi & Amjad, 2017;Rouf, 2015). Inflation is another factor that has emerged as wielding a significant impact on financial performance.…”