Does Capital Structure Drive Profitability in the Energy Sector?

Abstract

This paper investigates the factors that determine the profitability of non-listed energy firms from four central European countries: Hungary, Poland, Slovakia, and the Czech Republic. We apply the regression analysis, on a large panel of firm-year observations for the 2015–2019 timespan, to verify the hypothesis on the inversed relationship between leverage and profitability of the companies performing in the energy sector. Our results support the inversed relationship for debt in total and long-term debt, which are consistent with the assumptions of the pecking order theory. However, for short-term debt, we have found a direct relationship, which confirms the assumptions of the trade-off theory of capital structure. Our work contributes to the existing debate on the interplay between financial leverage and profitability, by providing evidence for a large panel of non-listed firms, from a single sector (energy)-oriented perspective.

Capital Structure and Financial Performance of Moroccan Agricultural Small- and Medium-Sized Enterprises: Moderating Effects of Government Subsidies

“…To address this concern, our study adopts a comprehensive approach by incorporating two distinct debt indicators: short-term debt and long-term debt. This approach aligns with previous research (Abor 2005;Salawu 2009;Gill and Biger 2011;Ebrati et al 2013;Hasan et al 2014;Sakr and Bedeir 2019;Wieczorek-Kosmala et al 2021) and ensures a nuanced analysis of capital structure's impact on financial performance.…”

Nonlinear Impact of Financial Leverage on Profits: Case of Listed Companies in Vietnam

“…Assessing the impact of financial leverage on profitability, the same conclusion is confirmed by the empirical research of Mavromatti et al (2021), Silambarasan & Azhagaiah (2015), Chowdhury et al (2010), Habib (2014), Kumar (2014), Patel (2014), Shahzad et al (2016), Tayyaba (2013); in contrast, experimental evidence for the opposite effect was found by Wieczorek-Kosmala et al (2021), Chen (2020), Zeitun et al (2015); Dawar (2014), Agburuga & Ibanichuka (2016), Pavan Kumar (2017), Sen & Ranjan (2018); Villalonga & Amit (2006). Thus, the empirical evidence indicates a possible positive or negative relationship of financial leverage on profitability, which is a linear function, that is, the slope of the return is constant for all different financial leverage.…”

“…Many other empirical evidences also confirm that financial leverage has a negative effect on profitability. Specifically: Wieczorek-Kosmala et al (2021), investigating the determinants of profitability of unlisted energy companies from four Central European countries: Hungary, Poland, Slovakia and the Czech Republic, time 2015-2019. The research results support the inverse relationship of financial leverage to profitability, which is consistent with the assumptions of pecking order theory.…”

Composite Scores of Debt Financing and Economic Value: Empirical Evidence

“…Academicians and industry professionals alike continue to investigate the components that are most significant to the company's performance [29]. Although questions about the relationship between a company's capital structure and its performance have been the subject of much discussion in the academic literature, there has been no attempt to draw a definitive conclusion.…”