Capital Structure, Equity Ownership and Firm Performance: Evidence from India

Khan, Mohd Imran

doi:10.2139/ssrn.2016420

Cited by 11 publications

(10 citation statements)

References 35 publications

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“…There was no significant effect of efficiency on leverage in the study of Khan (2012) which was consistent with the study of Jensen and Meckling (1976) in his agency cost model which revealed evidence of non-linearity in the association between the type of ownership with capital structure and firm performance.…”

Section: The Nexus Between Debt Financing and Firm Valuesupporting

confidence: 77%

The Effects of Financing Risk on the Value of Firm and Profitability: Evidence from Nigerian Commercial Banks

Ebenezer

Islam

Junoh

et al. 2019

Asian Economic and Financial Review

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This study is designed to address the critical issues of financing risk in the banking industry. The data from sixteen selected commercial banks' audited financial reports from 2009 to 2015 was used, making up to 112 observations. The panel data approach was used in the study for the analytical models. The market-based and accountingbased measure was used to proxy firm performance while financing risk was proxied by the Short-term debt, Long-term debt and Total debt ratio. The controlled variables used in this study included bank size and the GDP growth rate. Based on the random effect analysis in the models, the TDE ratio and GDP had a negative significant effect on firm value, suggesting that improvement in the TDE and GDP would increase firm value. The LTD ratio had a positive significant effect on firm value. The STD, LTD and TDE all impacted negatively on the banks' return on assets. This suggested that a decrease in STD, LTD and TDE would lead to an increase in banks' return on asset. The STD, LTD and GDP had a negative and significant effect on the banks' net interest margin. The firm size had no impact on either the firm value or profitability measure used in the study. It was observed that the GDP played an important role in the performance of the commercial banks in the study. Hence, this paper suggests that further study can explore the effects of firm characteristics on firm value by exploring non-financial firms and/or a cross-country study. Contribution/ Originality:This study is one of few that offers new insights on the nexus between financing risk, profitability and firm value which provides some valuable evidence for policy makers, academics, and other stakeholders.

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Section: The Nexus Between Debt Financing and Firm Valuesupporting

confidence: 77%

The Effects of Financing Risk on the Value of Firm and Profitability: Evidence from Nigerian Commercial Banks

Ebenezer

Islam

Junoh

et al. 2019

Asian Economic and Financial Review

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“…However, some other results have been consistent to the agency cost model and showing no relation and no impact of capital structure decisions on the firm performance (Jensen and Meckling, 1975). The results of Khan (2012) in his investigation he found an insignificant effect showing no impact for leverage on performance (profitability). In 2011 several studies focused on the impact of capital structure decision on financial performance, the majority of these studied have been performed on developing countries and presented similar results.…”

Section: Literature Reviewmentioning

confidence: 90%

Impact of Capital Structure on Firm’s Performance: Focusing on Non-financial Listed Egyptian Firms

Sakr¹,

Bedeir²

2019

IJFR

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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.

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“…Summarizing the above, revealed multidirectional influence of the capital structure on profitability suggests a non-linear relationship (see, e.g. Stulz, 1990;Khan, 2012), which we plan to identify and explore in this paper. The work (Le and Phan, 2017) notes that non-linear relationships appear only when efficiency is measured by ROE, and capital structure is measured by total and short-term debt.…”

Section: Introductionmentioning

confidence: 99%

Company performance and optimal capital structure: evidence of transition economy (Russia)

Spitsin

Vuković

Anokhin

et al. 2020

JES

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PurposeThe paper analyzes the effects of the capital structure on company performance (return on assets). The analysis is conducted in a large sample of high-tech manufacturing and service companies in the transition economy (Russian Federation). In addition to the aggregated analysis, separate investigations are conducted to scrutinize the impact of company age, size and location factors (the effects of agglomerations). This research postulates the existence and variability of the optimal capital structure and its dependence on economic crisis.Design/methodology/approachWe utilized a large sample that includes 1,826 enterprises over the period from 2013 to 2017. The estimation was performed using the panel-corrected standard error estimation technique (Prais–Winsten regression) to account for the panel nature and distributional properties of our data. The existence of the optimal capital structure was assessed based on a curvilinear (quadratic) function.FindingsThe results are consistent with the Static Trade-off Theory and show that this theory is applicable to countries with transition economy. They demonstrate that effective management of the capital structure can increase return on assets by 16–22%. The optimal share of borrowed capital is higher for small businesses compared to larger ones and for enterprises located in agglomerations compared to those located in other regions. A greater increase in profitability can be achieved by larger firm companies compared to smaller ones. High share of borrowed capital leads to negative profitability, i.e. to losses by enterprises. No significant differences in profitability growth were identified between young and mature enterprises. The optimal share of borrowed capital that maximizes return on assets is in the range of 0–21%.Research limitations/implicationsDue to the SPARK policies, our access to the data has been limited to a five-year window, which imposed certain limitations on the choice of econometric methods we could have employed and somewhat limited our ability to contrast the effect of the crisis period with the period of stability. In this sense, although our results pertaining to the effect of the crisis could be treated as conservative, future research should consider extending the panel to include more years into consideration.Practical implicationsWe identified significant differences between optimal capital structures and actual capital structures for high-tech enterprises. The contribution of this study is that the calculations were made for a country with a transition economy under crisis conditions. Countries with transition economies and developing countries tend to be characterized by a high level of interest rates on loans and a high proportion of borrowed capital in total assets. This poses difficulties for companies relying on borrowed capital to finance their operations. At the same time, our results demonstrate that in transition economies, enterprises in high-tech industries do have an optimal capital structure that allows maximizing firm performance. That is, Static Trade-off Theory is applicable to transition economies characterized by high interest rates on loans.Originality/valueThe novelty of this study lies in the detailed analysis of high-tech industries in Russian Federation. This analysis makes use of sophisticated econometric techniques for the first time in this context.

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Capital Structure, Equity Ownership and Firm Performance: Evidence from India

Cited by 11 publications

References 35 publications

The Effects of Financing Risk on the Value of Firm and Profitability: Evidence from Nigerian Commercial Banks

The Effects of Financing Risk on the Value of Firm and Profitability: Evidence from Nigerian Commercial Banks

Impact of Capital Structure on Firm’s Performance: Focusing on Non-financial Listed Egyptian Firms

Company performance and optimal capital structure: evidence of transition economy (Russia)

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